Customer Acquisition Cost (CAC) is a key SaaS metric that accounts for how much it costs your company to procure each new customer. The received wisdom is that reducing your CAC is one of the best ways to increase your startup’s profitability and likelihood of success.
However, this metric calls for discerning judgement. What it tells you about your company will depend on your goals, your business model and needs, and your customer lifecycle.
There is no simple answer to the question of whether — and by how much — to reduce CAC.
CAC includes costs directly related to bringing customers in the door — like marketing campaigns, sales outreach, and onboarding processes, as well as more indirect expenses like staffing for these functions and resource/equipment costs.
You calculate CAC by tallying all of the spending directly and indirectly dedicated to acquiring customers in a given period, then dividing that by the number of customers you acquired in that period.
Here's the million dollar question: Should your SaaS startup focus on lowering its CAC?
Generally speaking, having a CAC lower than your competitors is a good thing. The less it costs you to bring a customer in the door, the better.
However, as with many things in life, you get what you pay for. So, it’s important not to become obsessed with lowering that cost at the expense of the quality of your marketing, sales, and onboarding processes. Accordingly, your goal should be to improve the cost structure and scalability of your business. This means cutting out any CAC expenses that are not necessary, but stopping before you handicap the essential functions that you need to grow.
It’s also important to look at your CAC in the context of the rest of your business, particularly how long the customers you acquire stay with you. Low CAC may not look so good if you also have low retention rates. Spending small amounts on acquiring customers that leave you quickly is not much better than spending large amounts on customers that stick around. In both cases, your spending may well be too high relative to how much you’re getting back from your customers over time (also known as customer lifetime value, or LTV).
Is a high CAC ever good?
There are actually times when you may want to increase your CAC. If your CAC and your LTV are both low, you probably need to spend more on sales and marketing to attract better-fitting clients that you can retain longer. These conditions will generate more revenue for your business over time.
That said, only you can make such judgements for your business after you analyze your numbers and see how they trend. Your decision really depends on your goals for your company.
A high CAC may work for you if you want to promote stability and predictability in your company’s revenue, and you're not as interested in scaling quickly. This strategy is good for those who want to grow their business slowly over time without major equity investment or a flashy exit.
Can your startup lower CAC without sacrificing quality?
If you know you need to lower your CAC but want to make sure to do so without impairing your ability to bring in your ideal clients with higher lifetime value, one good option is to niche down.
Developing a product for a highly-defined target audience can make it easier to find and attract customers who need exactly what you are offering and can be acquired with relatively little expense. Such customers are also more likely to stay with you over the long term since they’re apt to find significant value in the specialized product you’re selling.
Niching down is a strategy that will set you up for sustained, steady growth. You may have to sacrifice a chance at generating the explosive growth equity investors look for. But you’ll be able to more accurately identify and attract the customers who are right for your business, which will improve your CAC, your lifetime value, and thus your company’s health and profitability.
Regardless of whether you focus on a niche or sell to a general audience, however, judging your CAC in the context of your entire business and the market you’re selling to is essential.
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