Churn is not the only issue bothering SaaS marketers today. The increasing cost of acquiring customers can spell equal trouble. This is especially true for SaaS businesses in the growth stages or moving beyond product development, where efficient resource allocation is crucial.
CAC or customer acquisition cost has been on the rise in the SaaS space because of -
- Intense competition
- Low customer engagement (because of competition and more channels/ platforms)
- Changing customer behavior
- Rising online privacy regulations, making targeting tough
- The ‘growth at all costs’ mantra most businesses tend to follow
Plus, everyone’s dealing with the threat of recession and trimmed budgets. Hence, tracking and reducing SaaS customer acquisition costs is critical to ensuring the success of campaigns and boosting revenue.
In this post, we will share interesting insights on how to reduce CAC to boost your firm’s revenue and uphold the good health of your sales, marketing, and customer service programs.
What Is SaaS CAC?
Customer acquisition cost or CAC is the total overhead cost for acquiring a paying customer. To calculate it, you need the full spend of your go-to-market business (sales and marketing) during a period and divide it by the total number of new customers secured during the same period.
The costs include everything a firm spends to acquire customers and close the sale, like sales and advertising costs, creative costs, marketing distribution, production costs, cost of tech subscription tools, and cost of sales and marketing teams.
For example, if your company spent $100,000 in a year for acquiring 100 customers, your CAC is $1000.
For What Type of SaaS Businesses Is CAC Important?
CAC is a critical KPI for all SaaS businesses. However, CAC has a profound impact on companies targeting revenue and competing in low-margin segments. Further, for businesses preparing to increase their investments CAC is key to ensuring long-term profitability. That’s because CAC points out areas of inefficient spending.
SaaS firms enjoying an established client base may not invest as much in new customers and hence use CAC as a threshold. Also, this KPI may not be of great significance for high-growth and cash-rich firms that prioritize customer numbers. However, in these cases too, SaaS CAC shouldn’t be ignored as a high CAC is tough to reverse and sustain.
In the B2B SaaS space, the typical customer journey spans several months; hence, it’s a good idea to look at the annual CAC. Further, to understand the impact of your investments on customer acquisition, you must compare CAC with the recurring SaaS revenue (Customer lifetime value or CLV) these new customers bring to your business.
We will see more on this in the subsequent sections.
Why Should a SaaS Marketer Track CAC?
Analyzing CAC is ever more important for SaaS businesses because they hugely depend on the customer lifetime value (CLV). Owing to the nature of the customer journey, SaaS companies devote a lot of resources before they see a return on investment.
Thus, assessing how many months of revenue are needed to recover the cost is important. In many cases, it may take longer for a company to recover the SaaS CAC and talk about revenue.
Simply put, CAC helps in discerning if you are managing a profitable and efficient go-to-market (GTM) SaaS. This is what your C-suite and finance team will care about most.
Here are a few other reasons why SaaS marketers should track CAC and take measures to reduce it.
- It improves ROI
CAC allows marketers to analyze the marketing ROI, empowering them to make data-driven decisions.
Say, a business leverages social media and email marketing to acquire customers and gets 10 customers from each channel at the end of the quarter. On the face of it, both channels are fetching the same number of conversions but the cost involved may be different.
CAC is a good metric to measure which channel has a lower acquisition cost. So, if email is a costlier channel, you will want to focus more on social because that’s getting you the same number of customers at a lower cost.
- It improves SaaS revenue and profit margin
Going by the same example, let’s assume the value of 1 customer is $80 and the CAC for social is $60 and email is $90. In this case, social media will improve your firm’s revenue as its CAC is lower than the value of a customer. That’s not the case with email.
Thus, analyzing CAC allows you to improve your profit margins and revenue.
- It helps in identifying high-value customer personas and measuring their price sensitivity
Determining CAC is crucial for picking the right customer and maximizing SaaS revenue. You surely do not want to spend on a customer who has the paying capacity or willingness to pay but costs just as much to acquire.
On the other hand, you wouldn’t want to waste your resources on a new customer who may be low on CAC but doesn’t have the paying capacity. For instance, the freemium customers may be burdening your firm’s revenue model.
- It helps in setting benchmarks for future budgeting
Tracking CAC establishes a firm’s present point of spending. This forms the basis for setting benchmarks for budgeting. It helps in understanding how a firm’s margins and SaaS revenue will look as they grow. Thus, marketers can set goals and adopt strategies to reduce CAC (or even increase it if that will boost revenue).
Your Guide to Reducing CAC
- Be Clear on Who Your Target Customer Is
SaaS firms often lose millions of dollars attracting the wrong set of customers to their websites, sharing content that doesn’t address the pain points, or using the wrong keywords in their pay-per-click campaigns.
Lincoln Murphy, the Customer Success & Growth Consultant, shares in a recent article how just 3 bad-fit customers can cost businesses a loss of $1.2M in revenue.
In the SaaS domain, ignorance isn’t bliss.
Having a clearcut customer persona is central to determining if the customer is a good fit and ultimately connecting with the decision-makers. This ensures the brand message and the campaigns surrounding it reach the right people, thereby optimizing sales and marketing costs. Quantify the range of ICP you can serve early in the customer development process.
Having a clear ICP -
- Improves the level of personalization in campaigns
- Enables market specificity
- Presents data for optimization of the product-market fit
Besides, determine the length of the sales for optimal conversion. How much is the customer willing to pay for your product? What’s their price sensitivity? What features move them to make a purchase decision? All this research should be done at a quantitative level. The insights will help you optimize resources and get the best out of your campaigns.
Investing in automation is one of the best ways to reduce the time spent by the sales and marketing teams (and hence, the cost) on menial tasks. Human touch is expensive.
For instance, if each of your leads is spending 15 minutes talking to your sales team before they can sign up for a demo, you’ll be amazed at how much this can cost you in terms of CAC.
Similarly, imagine the effort and cost involved when your technical marketing team spends hours on tasks like fetching and crunching data dashboards from various platforms or tracking KPIs to see how a campaign is performing.
Automation can optimize your business processes and reduce the costs involved in these processes.
For instance, a revenue marketing platform gets all the data in one place, analyzes thousands of KPIs across channels, and shares key insights impacting SaaS revenue.
Likewise, a CRM tool can increase the rate of converting leads, improve the targeting of emails, align your sales and marketing teams, and more.
Of course, you need to balance the human touch and automation. Measure the impact reducing human touches has on the customer CLV versus the decrease in CAC. This will help you make an informed decision.
- Pay Attention to the CAC/CLV Relation
The cost of retaining a customer is lower than obtaining a new one. Hence, if you retain customers they remain longer, thus increasing the CLV and the revenue generated.
Both CAC and CLV are critical business metrics when assessing the spending-to-profit ratio. As a rule of thumb, to be profitable, SaaS firms should target a CLV:CAC ratio of 3:1. So, if the firm’s average CLV is $200 and the CAC shouldn’t be more than $60 (roughly 3:1).
Here’s a CLV:CAC ratio table that can help you determine if your company is making profitable business decisions. The ratio shared below are indicative of businesses spending too much to acquire customers and may vary based on the nature of the business and the stage of growth they are in. However, this table will form a sound basis for analyzing your business health.
- Invest in Owned and Earned Media (not Paid)
If your SaaS marketing strategy heavily depends on paid media, your CAC will surely build up. That’s because the returns on paid advertising are linear and after a while, you’ll find it tough to move the needle, regardless of how much you spend.
Instead, it’s wise to invest in owned and earned media that offer consistent returns and build a solid loyal audience. Owned media (website and blog content, research reports, and white papers) and earned media (backlinks or publications writing about your firm) progressively generate returns with the same ongoing investment.
Here are a few tips you should consider to boost CLV.
- Leverage the power of customer data
Looking through customer data can help you understand which ones are at a high risk of churn or need to be retargeted. Such insights can help you reach out to these audience segments with relevant promotional offers.
- Introduce/ strengthen customer loyalty programs
Give your customers a reason to stay with you. This could either be exclusive access to additional perks or features or a free VIP membership.
- Build a strong customer support team
SaaS customers need support at a personalized level throughout their journey. Make sure you set up a proactive support team that can be easily accessed by customers.
CAC is a critical business KPI for most businesses. However, it is all the more important for SaaS companies because they depend on customer lifetime value. Any smart SaaS marketer wouldn’t want to go after a customer who has a high lifetime value but costs much more than that.
Reducing CAC has a big impact on the success of a SaaS business. Track this important metric to optimize your customer acquisition tactics and boost business revenue.
- What is CAC?
CAC or SaaS customer acquisition cost is a critical SaaS KPI that measures how much a business spends for acquiring new customers. It is a critical business metric that along with the value of the customer to the company and the resulting return on investment can help in shaping business strategies.
You can calculate CAC using this formula.
CAC = Cost of Sales and Marketing / Number of New Customers Acquired
- What does CAC include?
CAC is the sum of all sales and marketing expenses like -
- Advertising and marketing costs
- Salaries of sales and marketing teams
- Cost of equipment they use
- Cost of software and tools like CRM and marketing automation
- Event sponsorships
- What is the ideal CAC for SaaS businesses?
CAC is always assessed along with other metrics like CLV. To be profitable, SaaS businesses should target a CLV to CAC ratio of 3:1. If businesses maintain this ratio, their growth will be sustainable because they are generating more SaaS revenue than the cost involved in acquiring new customers.
- What is customer lifetime value (CLV)?
It is the revenue you get from any given customer during their entire lifetime with the company (using your product or service). This metric helps you gauge current customer loyalty.
The metric also helps you determine -
- How much to spend on acquiring a similar customer while having a profitable relationship?
- How much revenue to expect from an average customer over time?
- Who are your most profitable customers and what types of products do they expect?
- Who are your loyal customers? What do they like? Why do they continue to purchase from you?
- Which products are high-profit?
- How to calculate CLV?
The simplest method for calculating CLV is using this formula -
CLV = average value of a purchase X # times the customer will buy each year X average length of the customer relationship in years