“The best advertising is done by satisfied customers.”
We anticipate that you agree with this quote and with the idea that in order to satisfy your customers, you first need to get them through your door. That’s where customer acquisition strategies give you a helping hand.
And when you sum up the results of your CA endeavors and statistics, you discover one of the most vital SaaS metrics – your customer acquisition cost.
In today’s guide, we will tell you CAC definition, show you how to calculate it correctly, prove to you why it’s a must-know metric, and share some actionable ways to reduce your costs of acquiring new paying users.
Let’s get started.
SaaS CAC is a metric that stands for customer acquisition cost and shows how many financial resources you invest to acquire a single paying user. You might have encountered another term – CPA (cost per acquisition or action) and may guess they are acronyms used interchangeably or have a similar meaning. In reality, there’s a huge difference.
CPA is a pricing model typical to online advertising that indicates the number of investments you make to generate the desired action – click, form submission, registration, newsletter signup, free trial registration, downloading gated content. Anything from this list or more options depending on what you consider “the desired action”.
As you can see, a visitor may follow your CTA and take a step but he may not reach the bottom of the sales funnel and get stuck in the middle of it. All this logically means that your CPA should always be lower than your CAC.
You may be wondering what’s the average CAC for SaaS companies. The answer is – there’s no perfect answer and consequently no ultimate number you should be striving for. If you charge $39 per customer and your SaaS CAC benchmark is $20, you probably will not be satisfied with that number. But if your monthly subscription is $79, $20 may be a good option.
Unlike some other SaaS metrics that can be calculated in more than 1 way, the CAC SaaS calculation formula is fixed and won’t make you feel confused. Here’s the formula:
CAC = Total Cost of Sales and Marketing/ # of Customers Acquired in a Given Period
For example, your total spending in the first quarter is equal to $1248 and you acquired 10 paying users. Your SaaS CAC ≈ $125.
Given period? We mean you should figure out how much you invested in your sales & marketing, for example, in the first half of the year and how many customers you acquired in the same period. If your sales cycle usually lasts for more than 6 months, in this case, you’d better broaden the period of calculation to, for example, 8-9 months. And you should calculate your expenses for the same period accordingly.
Sales cycles usually take long when customers are getting ready for long-term business relationships and are going to spend a large amount of money. In the SaaS industry, that’s usually the case for the annual subscription, as for a company, it’s much easier to close monthly than annual plans.
Pro tip 1: Calculate your customer acquisition cost per marketing channel
Some marketing channels require more expenses and bring more customers, others require fewer investments and bring the same number for customers. Separate CAC for each channel will increase the value of this metric and provide more powerful statistics for your future marketing activities.
Pro tip 2: Calculate your CAC SaaS on a regular basis
Customer preferences change, your product features change, your marketing campaigns change. You can’t move forward expecting CAC that was viable a year ago and forget about structural or strategic alterations that have been applied.
Is your office space rental included in your CAC? Are your technical team salaries included? Not really. Here’s what should be considered part of your sales and marketing expenses:
1. Salaries of your marketing and sales team members,
2. Benefits & rewards your Smarketing team members enjoy,
3. The money you spend on PPC ads, affiliate/influencer marketing campaigns, referral discounts,
4. Monthly payments for online tools your team uses (KR, PPC, email marketing or other tools),
5. Customer service team expenses also may be included in your CAC if they actively participate in answering queries from potential customers (e.g. via chat or email),
6. Others costs you pay for marketing or sales consultation, design & development activities to make your customer acquisition campaigns more productive.
Investments in improving your software, hiring new software engineers or other payments not mentioned above should be excluded from your SaaS CAC, otherwise, you might be scared of the extremely high cost that isn’t even close to reality.
Failing to reach a balance between your SaaS pricing and costs may be one of the reasons for a SaaS startup collapse, alongside the reasons like not satisfying the market needs, lack of cash, wrong or unprofessional team members, and fierce competition. Let’s look at the benefits of calculating your SaaS CAC point by point below.
#1 You understand how much you spend and whether to optimize your investments
Maybe you support the idea that good marketing is never redundant but won’t you agree that analysis and optimized marketing spend is much more preferable? When you know your SaaS CAC, you can compare your results with your competitors (if you are able) and see, perhaps you are too lucky or too unfortunate (and need to read our next section more attentively).
Say your customers who convert from organic search cost incomparably less than customers from PPC. Why not reinforce your SEO activities and cut down your PPC expenses if you have reliable data to rely on? There are no magical or futile strategies.
Every business individually discovers which digital marketing approach drives the most revenue. If you can acquire the same number of customers with lower investments, you reach higher ROI and increase your net profit.
#3 You learn your LTV:CAC ratio and check your SaaS healt
One more SaaS metric enters the game – LTV. Maybe you will say – marketing and growth don’t follow any general rules. But 3:1 LTV:CAC ratio has been recognized as the minimum any SaaS business should strive for.
A high ratio is typical for fast-growing successful SaaS businesses and also companies who save money on their Smarketing expenses. Thus, they acquire a few customers with little expenses. Make sure your SaaS will fall under the first category should one day you exceed 3:1 ratio.
#4 Your investors would like to know how scalable your SaaS is
Your SaaS startup may offer a perfect solution for the X group of people and work with a wonderful team. But do the members of that X group convert slowly and require plenty of dollars? Your investors don’t want your CAC to be higher than or equal to your pricing (nor you want). And you should first know how much your SaaS CAC is to think about reducing it or being happy with your current situation.
So what to do?
#1 Encourage your customers with a referral program – The most common way to build your referral program is to offer 10% to your customer once his friend subscribes to one of your plans. If your customers pay you $39 per month and refer to 5 friends, they get a 50% discount and you get 5 paying users. You invest $19.5 and your ROI $195. Anything better?
#2 Optimize your pricing page (including pricing plans) – That is immensely important. If only you knew how psychological approach can increase the conversion rate of your pricing page.
If only you knew how many visitors will leave your pricing page because of poor design, unintuitive interface, and absence of clear info about your software features.
Would you subscribe to software with the pricing page below that neither targets buyer personas nor even mentions features available in every plan?
Users ask for software recommendations on Quora and visit review sites like Capterra to find the online tools they need. For example, Capterra is designed right for the SaaS industry so people quickly find the software they are looking for. All you need is to send a request to Capterra and create a compelling profile on their website.
Quora doesn’t welcome too many links to your website and self-advertisement but if someone directly asks for the software name, you first help with your answer, then advertise.
#4 Minimize manual processes, invest in marketing automation
We mentioned above that marketing tools are part of your overall Smarketing costs. But they more give than take, no matter whether you go for PPC or inbound marketing. If you want accuracy in your research and optimization efforts, a precise marketing tool will become a lifebuoy for your SaaS.
Wrong statistics are worse than the lack of it. If you zero in on SEO content production, you need a paid tool that will give more professional and accurate suggestions regarding keywords. If you focus on email marketing and want to educate your customers before converting them, you need to send massive emails. And hopefully, not manually.
#5 Reduce investments on PPC and leverage inbound marketing
We don’t claim PPC is a weaker strategy or inbound methodology is the only force we trust in. We simply look at the reality. The visibility of your PPC ads is temporary: once you stop your ads, you will not appear on SERP anymore (if you don’t do any SEO). SEO content serves you even when you don’t have money for paid promotion.
Which marketing channel is the most cost-effective for you? Which points in our guide are you going to use in your marketing activities that are meant to optimize your CAC?