A Complete Guide to Calculating Customer Acquisition Cost for SaaS
In most industries, success is a careful balancing act between risk and reward. You can’t create a successful product in the SaaS world without investing time, money, and energy from the get-go.
The trick to SaaS success is finding ways to guard yourself against risk while increasing your odds of reaching your business goals. A handy calculation to use during this process is the customer acquisition cost (CAC) of your SaaS product.
But determining your customer acquisition cost is complicated. If you’re too cautious, you’ll lose out on customers and revenue. If you’re too confident, you might spend too much, killing your SaaS enterprise before it’s had a chance to grow.
It’s also becoming increasingly difficult for companies in the business-to-business (B2B) industry to acquire new customers. CAC has increased by almost 50% in the past five years.
In this article, we’re going to walk you through the ins and outs of all things CAC — what it is, why you need to understand it, how to calculate it, and what to do to get the most out of it.
What Is Customer Acquisition Cost for SaaS?
Your CAC is how much it costs you to acquire a new customer. This metric is measured over a specific timeframe, and a variety of factors should be considered — from advertising and sales costs to salaries and more. The CAC is also influenced by your industry and your business’s customer acquisition strategies.
The basic formula for calculating CAC for SaaS is as follows:
Total costs of sales and marketing / Total number of acquired customers = CAC
The aim is to spend just the right amount of money to convince new customers to purchase your product without endangering the lifetime value (LTV) of your SaaS product and the resultant revenue.
Ultimately, your CAC should be much lower than your LTV.
Why Is Understanding CAC Important?
Keeping a close eye on and understanding your CAC will help you establish which resources you need to acquire new customers and grow your business.
You can also use your CAC to determine how profitable your business currently is. For example, look at the amount you’ve invested in your recent marketing and sales strategy and compare this to the number of customers you’ve acquired with its implementation. Did it cost you more to acquire these customers than they’ve spent with your business?
Without looking at your CAC, you won’t know if your sales and marketing efforts have been successful. For example, you might have gained a high number of new customers, but the cost of doing so could have been even higher, costing you profit.
Let’s unpack these and other benefits to understanding and using your CAC:
Optimize Business Processes
As mentioned above, grappling with your CAC is a critical element in optimizing your SaaS business, as it provides clues to how successful your business’s acquisition efforts are.
For example, by analyzing your LTV/CAC ratio, you’ll gain insights that will help you to optimize your sales and marketing campaigns. With this information, you’ll be able to fix weak points in your marketing and sales funnel and do away with ineffective sales and marketing techniques.
Ideally, your LTV/CAC ratio should be 3:1 or higher. So, you want to get at least $3 back for every dollar spent on your product. According to the Corporate Finance Institute, a ratio of less than 1.0 indicates that a business is jeopardizing its product’s value.
Perfect Your Pricing
Fine-tuning your CAC plays a vital role in perfecting the price of your SaaS product. CAC research pinpoints your high-value customer personas and gives you insight into their price sensitivity.
Doing your CAC research also helps determine the worth of a customer by clarifying how many resources you can profitably spend on them.
If specific customers aren’t willing to pay enough for your product to offset your costs, they shouldn’t form part of your target market.
Determine Payback Period
You can use your SaaS product’s customer acquisition cost to determine the payback period of your initial investment. It indicates how long it will take for you to recover from start-up costs and start turning a profit.
What Do You Need To Include In Your CAC Calculation?
When determining your SaaS product’s customer acquisition cost, two essential factors come into play:
• All sales and marketing expenses. These encompass anything used to acquire new customers, from employee salaries and software tools to the costs of your marketing strategy.
• The number of customers acquired. Only new customers acquired during a predetermined period must be taken into consideration when calculating CAC.
Learn the 6 steps on how to calculate your CAC right, as well as how to optimize it to increase profit, reduce expenses, and scale your SaaS company on PayPro Global’s blog.
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