SaaS businesses (startups and established) must continuously implement strategies to acquire customers and achieve sustainable growth and profitability.
Even so, these companies must always be conscious of the cost of their customer acquisition efforts.
This article will delve into the intricacies of the average customer acquisition cost in SaaS, including what it is, how to calculate it, and proven SaaS marketing practices for optimizing it.
TL;DR – Average Customer Acquisition Cost for SaaS Industry
The average CAC for:
Note: These figures vary depending on specific SaaS companies. More details on this later in the blog.
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What is CAC in SaaS?
CAC measures the total costs incurred by a business to acquire a new customer.
With this metric, SaaS businesses can measure the success of their marketing efforts in acquiring new customers and budgeting more effectively.
How CAC Impacts SaaS Business Growth
Understanding how much a business spends acquiring new clients can help inform decisions and facilitate scalable growth.
Check out these 4 impacts CAC has on business growth:
- Provides a Competitive Advantage: Achieving a scalable CAC gives SaaS businesses a competitive advantage, as they pay less to acquire new customers. The goal is to optimize customer acquisition efforts while bringing in high-value customers.
- Informs Budget Allocation: Monitoring CAC empowers informed decision-making. Businesses can decide where to allocate resources for marketing, sales, and other functions. The goal is to remain profitable, reduce spending, and achieve the best ROI.
- Boosts Investor Confidence: Investors often evaluate and note a business’s CAC to determine the scalability and efficiency of a growth strategy. A healthy acquisition cost can indicate a company’s ability to remain profitable and grow sustainably.
- Improve Sales Efficiency: Keeping track of CAC can help SaaS businesses identify hurdles in their sales funnel. Streamlining processes and workflow can reduce the costs and time needed to bring in new customers.
Key Metrics to Understand SaaS CAC
The CAC metric is often assessed along with other metrics.
Here are the 6 essential customer acquisition analytics to maximize the value of a CAC assessment:
1. Conversion Rate
It’s the percentage of customers who take a desired action in the sales funnel, such as signing up for a free trial or paying for a subscription. A higher conversion rate means acquisition efforts convert customers, leading to a lower CAC and high ROI.
2. Return on Investment (ROI)
The ROI provides a view of a business’s net returns relative to the investment cost. SaaS companies can use it to assess whether their marketing efforts deliver enough returns. A higher ROI indicates healthy spending when acquiring customers.
ROI = Total profits Total costs of investment100
3. Churn Rate
The churn rate shows the number of customers a business loses over a specific period. A high churn rate means increased acquisition costs for new customers and reduced CLV.
Churn Rate = Number of customers lost Total number of customers at the start of a given period
4. Customer Lifetime Value (CLV)
CLV is the overall value a customer brings to a business throughout their relationship with a company. An increase in a customer’s lifetime value decreases the acquisition costs.
CLV= Average total purchaseAverage buying frequencyAverage customer lifespan
5. CAC Payback Period
The CAC payback period is the time it takes a business to recoup the money it spent acquiring a customer. A short payback period (ideally 12 months) means reduced acquisition costs.
CAC Payback Period = Customer acquisition cost Monthly gross margin per customer
6. Cost Per Lead
The cost per lead (CPL) shows the amount of money spent to generate each lead. A high CPL without a corresponding high number of conversions will increase CAC.
Cost Per Lead = Total marketing spend Number of leads generated
If tracking and optimizing these SaaS CAC metrics seems challenging, leave it to the experts.
We can collaborate and leverage my marketing experience to develop effective strategies to optimize your business CAC.
Join me on a call to discuss how we can use this data to implement actionable strategies.
How to Calculate CAC for a SaaS Business
SaaS companies must know how to accurately calculate the CAC metric to gauge the effectiveness of their marketing strategies for sustainable growth.
Here is the step-by-step process:
Step 1: Define the Period
Depending on a company’s business cycle, the first step is picking a specific period to analyze. This could be a month, a quarter, or a year.
Step 2: Add Up Marketing and Sales Expenses
These include all costs associated with acquiring a customer during that period. Some of them include:
- Marketing Costs: Ad spend (Google Ads, Facebook Ads), SEO, social media.
- Sales Costs: Salaries and commissions of sales team members.
Step 3: Find Out the Number of Customers Acquired
To find the cost of acquiring one customer, it is crucial to determine an accurate number of new customers acquired during the selected period.
This can be all the customers who subscribed to a product.
Step 4: Calculate CAC
Once a business has an accurate figure for total marketing and sales expenses and the number of customers, the next step is to calculate the customer acquisition cost using this formula.
Customer Acquisition Costs (CAC)= Total sales + marketing costs Number of new customers acquired
Let’s illustrate the formula with an example: If a SaaS company spent $6000 for marketing and sales to acquire 200 customers, its CAC would be 30.
That is: $6000 200=30
Step 5: Analyze CAC and Refine Strategies
Based on industry standards, a business must rethink its strategies to reduce costs if the CAC is too high.
SaaS CAC Benchmarks and Industry Standards
It’s crucial to benchmark the CAC metric of a SaaS company against the industry standards.
Here are the standard two ways to assess a CAC’s standing relative to its competitors:
1. LTV to CAC ratio
A great way to assess a company’s CAC is to benchmark it against the customer lifetime value (CLV). While the two are different, they are directly linked.
A good CAC should always be lower than the CLV.
A general rule of thumb is to ensure a 3:1 CLV to CAC ratio. That means a SaaS business should generate three times more customer revenue than it spends to acquire them.
LTV: CAC = LTV CAC
While 3:1 is ideal, businesses can benchmark their CAC against these SaaS LTV: CAC ratios:
[table “” not found /]2. Average CAC of Different SaaS Companies
Another way is to compare the average CAC against industry standards, which allows businesses to assess their standing in the broader market and determine whether their costs are effective compared to competitors.
Here’s a breakdown of the average CAC for specific SaaS companies:
[table “” not found /]How to Use SaaS CAC Benchmarks for Business Decisions
Here are three ways companies can use CAC benchmarks to guide business decision-making and provide a reference point for performance:
- Forecasting Growth: Comparing a company’s CAC to industry standards allows marketers to assess whether future growth will be cost-effective or require a strategy change. A business will likely experience sustainable growth if its CAC meets the benchmarks.
- Streamline the Sales Process: Business owners can identify bottlenecks in the sales funnel using CAC benchmarks. A higher acquisition cost may require a readjustment of marketing and sales processes to convert leads into high-value customers efficiently.
- Developing a Pricing Strategy: If the CAC is too high compared to industry benchmarks, a SaaS company might need to reevaluate its pricing strategy to maintain healthy profit margins and remain competitive.
Strategies to Achieve Low Customer Acquisition Cost
What can businesses do to lower their CAC? Here are the 7 practical strategies to reduce acquisition costs:
1. Optimize Marketing Strategies
A business with a high CAC must restructure its SaaS marketing strategies. Consider focusing on marketing channels with better results to avoid wasting money on inefficient strategies.
2. Boost Customer Retention
Maximizing customer retention is a great way to optimize CAC. Businesses should prioritize building long-lasting, meaningful customer relationships to reduce churn. This way, they don’t have to spend more on acquiring new customers.
3. Keep Track of Metrics
Monitoring key KPI indicators associated with CAC, such as churn rate, can provide a business with insightful data that informs decision-making. These acquisition analytics can help identify and optimize high-performing channels to reduce CAC.
4. Leverage Technology
Technology such as automation tools and AI can revolutionize how businesses approach different aspects of operation, from customer relationship management to marketing. This streamlines acquisition processes and significantly reduces CACs.
5. Perform A/B Testing
SaaS businesses can gain valuable insights into consumer behavior and preferences by comparing different marketing tactics using A/B testing. Prioritizing winning campaigns can increase conversion rates and reduce the money spent acquiring customers.
6. Segment Customers
Segmenting SaaS customers into groups based on demographics, psychographics, and firmographics can help enhance personalization for improved results. Targeted marketing allows SaaS businesses to reach the right audience, build customer relationships, and reduce churn, ultimately lowering the CAC.
7. Implement a Customer Referral Program
A business’s best ambassadors are its customers. When implemented correctly, a referral program can help companies reach more customers for free, significantly reducing marketing and acquisition costs.
Frequently Asked Questions (FAQs)
Here are answers to several questions businesses have about customer acquisition costs:
What are the Best Tools to Measure Customer Acquisition Costs for SaaS Businesses?
Although these tools don’t directly calculate CAC, they provide the necessary data. Check out the three common tools:
- Mailchimp allows companies to track the performance of their campaigns — email click-throughs, conversion rates, and unsubscribed users. SaaS companies can also monitor the costs of email campaigns and get the number of new customers acquired.
- Google Analytics provides insights on website traffic and tracks conversion rates for different channels. Businesses can monitor the cost of Google Ads and generate acquisition reports per channel.
- HubSpot offers tools for SaaS businesses to track the costs of marketing campaigns, provide data into the customer lifecycle, and track sales and marketing expenses.
How Does Customer Lifetime Value Impact CAC in SaaS?
Comparing customer lifetime value to acquisition cost can tell a business how much it can afford to spend to acquire a customer.
A good CLV: CAC ratio for SaaS businesses should be 3:1 for sustainable growth.
How Often Should SaaS Businesses Reassess their CAC?
Businesses usually analyze the CAC metric annually, quarterly, or monthly to ensure acquisition costs align with company goals. However, the frequency depends on the business model.
Conclusion
Understanding customer acquisition costs is key to ensuring a business’s long-term profitability. Similarly, benchmarking it against industry standards can offer great insights into a company’s positioning.
When you partner with me, we can develop an acquisition strategy tailored to your SaaS business. We will monitor the CAC and implement tactics to generate leads, convert them into customers, and boost the bottom line.
Join me in a discovery call to discuss how we can collaborate to build targeted marketing campaigns that bring results and enhance ROI.
