Want to lead your SaaS company on a success march?
How much you spend to acquire a customer can carve out the future path of your SaaS business.
If your Customer Acquisition Costs are on the higher side, your beloved venture will be gasping for breath!
So the aim is to keep the CAC as close to the ground as you can!
But how can you do that?
We’ll get to it!
In this article, we’ll define what CAC is and discuss its importance for your SaaS business. We’ll also explain how to calculate it, provide tips on reducing the CAC for your company, and answer some FAQs about it.
This Article Contains
- What Is CAC in SaaS?
- Why Is CAC Important for Your SaaS Business?
- How to Calculate CAC?
- What Is a Good Benchmark for CAC?
- 3 Handy Tips to Reduce CAC for Your SaaS Company
- 2 FAQs Related to CAC
Let’s get marching!
What Is CAC in SaaS?
CAC, or Customer Acquisition Cost, is the average amount you spend to have a new customer purchase a subscription. This includes all expenses associated with acquiring a customer, such as:
- Marketing and sales teams’ salaries
- Paid advertising (e.g., Google Ads)
- Server hosting charges
- Etc.
Let’s dig deeper into why CAC is an important metric for your SaaS set-up!
Why Is CAC Important for Your SaaS Business?
Here are a few reasons why CAC enjoys an esteemed position in the SaaS arena, along with other heavyweights like customer churn rate and lifetime value! 🎖️
- Helps make strategic business decisions: Knowing how much you spend acquiring a new customer helps you make well-informed decisions about your business operations. For example, if your CAC is high, you can focus on organic customer acquisition instead of paid advertising to attract potential customers. CAC also helps you predict the net cash flow and decide the funds to allocate to your customer success team.
- Provides valuable insights on profitability: The CAC metric, in conjunction with Customer Lifetime Value (CLV), provides a clear picture of your SaaS business’s health through the CLV/CAC ratio. CLV is the total revenue that a customer is expected to generate over their lifetime, i.e., from the start of the subscription to its cancellation.
A high CAC and a long payback period, coupled with a low CLV and a high customer churn rate, result in a low gross margin over the acquisition cost. This indicates that your company has steered away from profitability.
- Helps better understand the unit economics: The CAC, along with customer monthly recurring revenue, annual recurring revenue, and CLV, forms the basis for SaaS unit economics. It lets you know the acquisition cost for a single customer so that you can better estimate it for a larger customer base. This can help you optimize your marketing strategy and pricing plans to obtain a higher gross margin over the acquisition cost.
Now let’s grab our calculators and do the math! 🧮
How to Calculate CAC?
In order to calculate your Customer Acquisition Cost, you’ll need to compare the total amount spent on acquiring customers during a specific period to the total number of customers you gained during the same period.
Here’s the CAC formula:
CAC = Total amount spent on acquiring new customers during a period of time / Number of new customers acquired in the given period
For example, let’s say for a given month, your company’s:
- The total number of new customers = 600
- Number of marketing professionals = 6
- Monthly marketing cost (personnel’s salary) = $60,000 ($10,000 per employee)
- Paid advertising and SEO = $20,000
- Free trial related costs = $5,000
So, your CAC = ($60000 + $20000 + $5000) / 600 = $142
Now, to keep your business afloat, your Customer Lifetime Value should be at least three times more than your CAC.
How to calculate the Customer Lifetime Value?
Here’s the formula you could use:
CLV = Average Purchase Value * Average Customer Lifetime (years) * Annual Purchase Frequency
Next, let’s have a look at the pitfalls you should avoid during CAC calculation.
3 Mistakes to Avoid When Calculating CAC
Accurately calculating the CAC value is important lest you set your SaaS sail towards the wrong port! ⛵
1. Including Costs Related to Existing Customers
Including the expenses incurred in retaining current customers in the calculated CAC will lead to incorrect results.
For example, you’ll have to be careful while including the salary of a team member who deals with both new and existing customer relationship management in your CAC.
Save your blends for later, be a purist here! 🍷
2. Excluding Costs Not Related to Sales and Marketing
Customer acquisition may require more than the efforts from your marketing and sales team, which makes it necessary to include those costs in your CAC formula.
For example, if you offer free trials of your SaaS product, you’ll have costs related to server hosting, onboarding platform designing, and customer support. Those should be included in your CAC calculation.
3. Not Applying Cost Amortization
Cost amortization means distributing the cost of an asset over a time period for which it will remain valuable for your company.
For example, let’s say your sales team attended a seminar on improving selling practices in March. You should spread out the costs related to it over the year, or you will have an unusually high CAC for March.
Don’t condense; give things their space and time! 🌌
Now, it’s time to weigh your CAC against the industry benchmarks.
What Is a Good Benchmark for CAC?
There isn’t an industry-wide benchmark for Customer Acquisition Cost, as it depends on your SaaS product and your target customers. However, you can count on the CLV/CAC ratio here.
The ideal CLV/CAC ratio for Software subscription businesses is 3:1 or greater. This means that the average revenue generated by a customer over the course of their lifetime should be three times or more than the cost of acquiring them.
Coming up next are a few tips to keep your CAC from soaring high! 🚀
3 Handy Tips to Reduce CAC for Your SaaS Company
In order to achieve a low CAC Saas companies can benefit from the following:
1. Quantify Your Customer Persona
You should know what your current customers like the most about your SaaS product and what pricing category they fall into. You should also know how long it takes to acquire a customer through a certain channel.
Having all this information in a quantitative form can help you assess whether your acquisition cost is viable.
Furthermore, measurable data points like these can help you divide your customer base into cohorts corresponding to different personas. You can then adjust your marketing strategy and pricing plans for each customer segment to keep your average customer acquisition cost in check.
Additionally, this approach can help you boost customer retention by employing customer engagement measures specific to each cohort.
2. Implement Organic Customer Acquisition Strategies
Employing an organic customer acquisition strategy instead of a paid marketing campaign can help you bring down the marketing cost, lowering the CAC over time. For example, you can use Search Engine Optimization (SEO) instead of Google Ads as a supplementary means of attracting potential customers.
You can also include a loyalty program in your customer success strategy. This can help with customer retention and increase their likelihood of recommending your product to others.
3. Increase Average Purchase Value
Increasing your Average Purchase Value (APV) or Average Order Value (AOV) can help you recover your CAC sooner by compensating for the sales and marketing spend. An increased AOV will result in a higher ROI (Return on Investment) and an increased Customer Lifetime Value.
How can you do that?
Through up-selling and cross-selling relevant SaaS products. Persuading your existing customers to opt for higher-value subscriptions can increase your average revenue per customer and help you recover the marketing expense.
Now, let’s answer a few questions you may have.
2 FAQs Related to CAC
Here are two questions to make things about CAC crystal clear!
1. What Is CAC Payback Period?
The CAC payback period, along with CAC, is an important SaaS metric that helps you gauge the profitability of acquiring new customers and predict the cash flow. It is the time a SaaS company takes to earn back the customer acquisition cost for an individual customer.
The CAC payback period can be calculated as:
CAC Payback Period = CAC / (MRR – COGS)
Where MRR is the Monthly Recurring Revenue, and COGS is the monthly Cost of Goods Sold.
The industry benchmark for the CAC payback period is less than 12 months for SaaS startups. For highly profitable Software subscription businesses, it could be 5-7 months.
2. How Is CAC Different from CPA?
CPA (Cost per Acquisition) is the amount you have to shell out for acquiring a lead or a freemium user. Customer Acquisition Cost, on the other hand, is a SaaS metric that includes all the costs ranging from lead generation to conversion.
CAC takes into account only those customers who buy a paid subscription to your SaaS product.
Plan Your SaaS Success March Guided by CAC
The CAC metric, along with its sister metrics CLV and payback period, helps you keep an eye on your SaaS company’s profitability.
Employ CAC to evaluate whether your SaaS business is viable and if you need to make any changes to your marketing campaign, pricing plans, and sales strategies.
And if you wish to lower your CAC by gaining customers organically, contact Startup Voyager.
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