How To Determine SaaS Customer Acquisition Cost (CAC) in 2020
Customer Acquisition Cost (CAC) is one of the essential metrics for a SaaS Company. CAC can help you understand how your marketing efforts are trending, improving, or declining over a given period. A simple explanation of CAC is:
Imagine you spent $500 on an advertisement to promote your SaaS product or service to the targeted audience, and you get ten new customers. In this case, the acquisition cost will be:
However, in a SaaS or recurring model, the CAC calculation method is slightly different from the traditional approach. This article will cover everything you need to know about Customer Acquisition Cost (CAC) for the SaaS business.
What is a Customer Acquisition Cost (CAC) in SaaS?
Customer Acquisition Cost (CAC) is the price of acquiring a customer to subscribe to your SaaS product/service on a recurring basis. The CAC is incurred by a SaaS Company to convince customers using different marketing channels to buy their SaaS products or service.
CAC is one of the most crucial factors and plays a major role in calculating the Lifetime Value of the customer and the ROI on acquisition cost. This calculation helps a SaaS Company determine how much resources can be spent on customer acquisition and which channels to use for acquiring those customers.
Most SaaS Companies use CAC to find working advertising methods and platforms to get more customers in a short period. Let us take a look at how to determine a Customer Acquisition Cost (CAC) in SaaS.
Determine SaaS Customer Acquisition Cost (CAC)
SaaS Customer Acquisition Cost (CAC) is an essential element in any SaaS company's valuation, especially for SaaS companies with subscription-based models.
Knowing CAC is essential because if it costs you more to get a new customer than it brings you the revenue, you're making a loss fundamentally, and you cannot have a SaaS business in profit.
A SaaS Company must be aware that the CAC can be very high initially, but they need to optimize it as they progress. So the acquisition cost is a key metric in any business to know if it will be profitable or not.
How do you calculate CAC?
There are many ways to calculate CAC. The simplest way is to take all the costs, including sales costs, marketing costs, salaries, and other activities' costs, and divide it by the number of newly acquired customers as follow.
• TS (Total amount spent on acquiring new customers): This includes the total amount of money spent on ads, promotions, marketing, salaries, rev ops, and sales.
• TNC (The total number of new customers acquired): This includes all the customers acquired by those ads spends, marketing, promotions, rev ops, salaries, and sales, etc.
Example: If you are spending $100,000 to acquire 100 customers, then the CAC will be as follows:
It sounds simple, but it's a complicated calculation; it may sound scary the first time you do it as the amounts can be very high. We've seen companies that have CAC in the $150 to $250,000 range.
So if you're in a business that cost you $200,000 to find a new customer, you know you need to charge up to a million to get your money back.
How to Get the Data to Calculate CAC
Take all the costs of acquiring new customers in the last 30 days, including:
1. Advertising and marketing cost
2. Sales salaries
3. Tools & technology used (CRM, Email Software, and Analytics, etc.)
4. Overhead associates (if any)
After adding these costs, you can use the previous section's formula to calculate the average Customer Acquisition Cost (CAC).
Best Channels/Platforms to Acquire SaaS Customers
In the previous section, we discussed what CAC is and how to calculate it. In this section, we will discuss the best channels we can use to acquire those customers.
It can be tough finding the right marketing channel to acquire SaaS customers. But, through the right marketing strategy and continuous testing, you can boost your sales online with the help of different marketing channels.
1. Google Ads (PPC)
Google Ads, earlier known as Google AdWords, is a type of paid advertisement generated in the Google search resulted from users’ queries. You want to showcase your SaaS product or service to as many people as possible, searching for a similar SaaS product or service. Then, Google Ads should be your preferred or No.1 marketing channel to attract more visitors to your website and convert them into sales/customers.
2. Search Engine Optimization (SEO)
Search Engine Optimization (SEO) is a strategy used to increase visitors' number to a website by obtaining a higher ranking on the Search Engine Results Page (SERP) – including Google, Bing, Yahoo, DuckDuckGo, and Yandex.
SEO can help divert your targeted SaaS customers interested in your SaaS products or services in your business. The more targeted customers visit your website, the more chances of converting those visitors into potential customers.
3. SaaS Product Review Websites
Tons of SaaS Product listing and review websites can help you quickly gain exposure once you get listed on those websites. Some of the popular SaaS websites are Trustpilot, G2 Crowd, Capterra, GetApp, TrustRadius, and more.
Review websites have the right presence on Search Engines, get your product listed, and gain some good reviews on the review website to build the brand’s authority and credibility. The reviewers use a combination of online research and product testing before adding a review for a particular product or service.
LinkedIn is beneficial if you want to use it as a resource to build connections in your industry. You can even connect with Fortune 500 executives on LinkedIn. LinkedIn notifies you when someone views your profile and helps you connect with them. LinkedIn also has hundreds of SaaS groups where you can meet SaaS entrepreneurs and make important connections.
Facebook features can help you connect with your target audience and drive attention towards your SaaS product or service. Use Facebook posts, live streaming, stories, videos, memories, and other free features to promote your subscription business and grow your audience.
Customer Acquisition Costs (CAC) largely depends on the stage of your company and your capital. If you are in the early days of your SaaS, then your CAC should be around 100% - 120%. For example, if you are spending $100-$120 for each customer, your SaaS product or service cost must be around $100-$120 per month. The key here is to get monthly/yearly renewals and upsells that could lead to higher returns (profit) in the future. However, to grow exponentially, you need to figure out how you can lower your CAC from your SaaS product or services cost.