Are you getting a lot of customers but still seeing your profitability drop or stay the same?
One reason could be your Customer Acquisition Cost (CAC) is too high.
CAC is a pivotal metric in the B2B SaaS industry. Understanding it is critical in finding the right customers for your SaaS business, using the right pricing strategy, and setting up your brand on the right growth trajectory.
As a SaaS SEO agency, we work with SaaS clients who prioritize and optimize CAC. In this guide, we’ll show you how to calculate yours and offer strategies to help you optimize it.
What We'll Cover:
CAC is one of the key SaaS metrics that businesses focus on. It is the average amount a business spends to acquire one new customer over a specific period. The calculation generally involves marketing, advertising and sales costs, but businesses may include other acquisition costs like expenses or technical costs.
The CAC metric highlights how many months of revenue you need from a customer to recover the costs of acquiring them. Calculating this metric and comparing it with your previous numbers lets you know whether your business is moving on the right track.
It drives sustainable growth, helping businesses allocate resources and manage profitability.
4 Reasons Why CAC is Important for SaaS?
Many SaaS businesses spend a fortune getting customers, yet they still fail to generate profits. Often, they are also attracting the wrong audience for the SaaS tool.
A SaaS business can understand why this is happening by calculating CAC.
Here are four reasons to include this SaaS metric for tracking and analyzing your business growth and profitability.
#1 Sustainability and Growth
Your business may spend a lot on different campaigns and strategies. But how do you know whether they are bringing results?
Measuring conversions isn’t enough. What if you spend $100 on acquiring one customer, and your most expensive subscription plan is $60?
CAC helps you determine whether your revenue streams are sustainable and if marketers can scale operations. Getting a grasp on this metric can set the stage for long-term growth and ensure your payback period isn’t too long.
An excellent method is to compare your CAC with the industry average to ensure your business is as efficient as possible.
#2 Profitability Assessment
You’re starting to bring in new customers from your recent social media campaigns. But are these campaigns profitable?
CAC is a barometer for profitability. It enables marketers to assess whether the revenue generated from each customer justifies the cost of acquiring them. It helps them make informed decisions about pricing, marketing channels, and customer segments to maintain healthy profit margins.
For example, if your social media campaigns only bring in users subscribing to your free versions, you can optimize these campaigns to position your premium pricing plans as more valuable.
#3 Strategic Decision-Making
CAC can help every team in your organization to make strategic decisions:
- Finance teams can use CAC to inform budgeting decisions
- Marketing teams can use it to gauge the efficiency and effectiveness of tactics and strategies
- Sales teams can use it to determine the efficiency of different tools, processes, and systems
- Management teams can base decisions on when and how to deploy capital as well as determine when additional capital will be required
Getting clear on CAC can help every team adapt to market changes, refine SaaS offerings based on customer acquisition cost considerations, and guide marketing, sales, and product development investments.
#4 Budget Allocation
Many businesses calculate CAC for individual large-scale campaigns and strategies as well. For example, if conducting a highly intensive ad campaign, you can calculate the CAC and compare it with subscription value.
This ensures you allocate your budget wisely by determining marketing channels and strategies that get you the best return on investment.
By eliminating low-performing channels and reallocating the budget towards the best strategies, you can reduce wastage, maximize your marketing spend, and optimize profitability.
What is an Ideal CAC for SaaS?
An ideal CAC varies from niche to niche in the SaaS industry. It depends on many different factors, like the complexity of your product, the typical length of your sales cycle, your target market, revenue goals, business needs, etc.
An ideal CAC will also change in different market conditions and business stages. For example, if you’re starting your business, your CAC might be higher than average as you invest a lot in different channels and growth strategies.
Here are two ways to determine if your SaaS business’s CAC is optimal.
CAC Vs. LTV
Customer Lifetime Value (LTV) demonstrates the average revenue you can generate from customers through the period they are associated with you.
By bringing CAC and LTV together, you can assess the efficiency and sustainability of your customer acquisition efforts. It answers questions like, “How effective is our sales and marketing?” and “How valuable will our business be in the long term?”
Here’s how you can calculate your LTV.
A high LTV/CAC ratio shows that your business runs efficiently and your sales and marketing strategies return good results and ROI. Investors are more interested in such companies as they have more potential for faster growth and higher valuations.
A low LTV/CAC ratio shows you are relatively inefficient in targeting and acquiring high-value customers. The exception is that you’re an early-stage startup, and you’re yet to build a reputation and have existing customers.
While a good LTV/CAC ratio is at least 3:1, for SaaS businesses, you should at least aim for it to be higher than one.
CAC Vs. CPA
Many businesses confuse Customer Acquisition Cost with Cost Per Acquisition (CPA). While these are similar metrics, there’s a difference between them.
While CAC measures the cost to get a paying customer for your SaaS business, CPA measures the cost to acquire a lead (a free trial sign-up, demo sign-up, registration, etc.)
Here’s an example to help you understand the difference better. If you sign up for a free month of Amazon Prime, you’re measured using CPA. Once you start paying for the month after your free trial, you’re measured using CAC.
Once you understand both metrics, you can refine your LTV calculations and find optimal ratios for your SaaS business.
How to Calculate CAC for SaaS?
You can calculate CAC by dividing the total cost of sales and marketing by the number of customers acquired. The numbers taken are for a specific period.
The different types of marketing costs that are taken in this calculation are:
- Trade shows, marketing events, and conferences
- Sales and marketing team salaries, benefits, and commissions
- Digital campaigns like email marketing, social media marketing, content creation & distribution, etc
- Direct mail campaigns
- Travel expenses
- Technical costs like subscription to sales, email marketing, and social media marketing tools
You also must be accurate with exclusions in this cost. Here are a few:
- Employee costs associated with those who are working on customer retention and not acquisition
- Credit card and payment processing fees
- Marketing expenses related to logo, branding, or anything not related to an acquisition campaign
- Customer training costs
The more accurate you are with your cost calculation, the more precise your CAC number will be.
How to Optimize CAC for SaaS
Companies should always be trying to optimize their CAC. It’s not only for higher profitability. It gets the most out of marketing and sales resources, so your budget is used efficiently by spending less money acquiring customers.
Here are five ways you can do that.
#1 Customer Retention
Customer retention brings stability to your business, and it encourages word-of-mouth marketing and referrals that lower your CAC. If you can get people coming to you instead of the other way around, you don’t need to spend massively on other acquisition efforts.
Here are a few tips to increase customer retention for your SaaS business.
- Create a loyalty program for your loyal subscribers and give them discounts or other benefits
- Engage with your customers on various social media platforms
- Provide existing customers with valuable content they can use to achieve more with your tool
#2 Targeted Marketing Campaigns
If you have an email marketing tool, you may be tempted to sell it to every B2B business. But should you do that? Or should you stick to niches that are more likely to subscribe to your tool?
By concentrating your marketing efforts on the most relevant prospects, you can optimize CAC by acquiring customers who are more likely to generate revenue for your business. This also reduces wasteful spending on audiences that are less likely to convert.
You must understand your niche, audience, and buyer personas for this tactic to work for you.
#3 Lead Nurturing
You can implement lead nurturing programs that guide potential customers through the buyer’s journey. Nurtured leads are more likely to convert, reducing the need for more marketing spending and lowering CAC.
For example, at MADX, we have created a free beginner SEO course to nurture those willing to implement SEO in their business and might look for an agency later on.
Below are some lead nurturing strategies for SaaS:
- Use email auto-responders and triggered campaigns for specific events
- Send targeted content for each customer stage
- Have product reviews and comparisons for buyers in the last stage of the funnel
- Reignite excitement with new feature updates or additions
- Create guides & tutorials to reduce the learning curve
- Send re-engagement campaigns
#4 Referral Programs
Referral programs engage existing customers, incentivize them to share your tool with others, and encourage them to subscribe. With a referral program, you can leverage your existing customer base as advocates for your SaaS product.
Running a well-designed referral marketing campaign can save money on customer acquisition in the long run.
Here are some questions you need to answer before creating a referral program:
- How much will we reward?
- Should we set tiered rewards to encourage more referrals?
- Where will we promote our referral program?
- How will we track ROI?
Look at how a SaaS company like Notion runs its referral program.
#5 Data-Driven Decision Making
Gut decisions are good, but you can’t always rely on them when it comes to business. You need to back your decisions with data if you don’t want your money to go to waste.
Data-driven decision-making ensures you invest resources where they are most likely to yield cost-efficient customer acquisition. For example, you can identify the most effective marketing channels, customer segments, and strategies.
Make the Most of Your CAC
Effective CAC management leads to sustainable growth and profitability for SaaS businesses. If you’re not measuring this metric, you’re missing out on opportunities to grow your business and get the most out of your marketing campaigns.
If you’re just starting or need more guidance on the metrics or SEO strategies you should implement for your SaaS business, get in touch with our team of experts.
You can even head to our blog to get more SaaS-related insights.