The software as a service (SaaS) industry is expected to be worth over $208 billion by 2023. With the SaaS market on the rise, your SaaS company stands to see more paying customers — and more competition.
Having the tools to know what truly matters helps you make informed business decisions. That's why it's essential to understand SaaS customer acquisition cost (CAC), an important metric that helps SaaS companies spend their resources efficiently. This guide to CAC for SaaS will help you understand customer acquisition cost and calculate it for your business to make the best use of your marketing dollars.
What is CAC in SaaS? CAC is how much money a company spends on sales and marketing to attract a new customer.
SaaS customer acquisition cost considers two main spending categories — sales and marketing. Together, these categories include every type of expense your company might have that aids in acquiring a new customer. CAC tells you how much your company had to spend in both of these divisions to bring in a single customer. The primary categories of spending include things like:
Calculating CAC tends to be complicated because you need several numbers that might take you some time to gather. However, the Saas CAC calculation is relatively simple once you have all the data you need. Essentially, the formula finds CAC by dividing the total amount spent on marketing by the number of customers acquired during the same period.
The SaaS CAC calculation formula is as follows:
All of the categories listed above factor into the SaaS CAC calculation, including your company's tech stack, outsourced marketing projects, and ad spending. Here are a few tips to remember when calculating CAC:
When calculating CAC, remember that this metric only analyzes the cost of acquiring new customers, not maintaining existing ones. If your sales and marketing teams also handle existing customers, you'll want to only factor in the amount of their salary that goes toward customer acquisition. You can figure this amount by dividing their pay by the percentage of time they spend on customer acquisition vs. their other responsibilities.
Be sure not to include expenses like these in your CAC calculation:
While the SaaS CAC calculation formula only includes sales and marketing spending, you should use more than those two categories to gain the most accurate insight. The formula uses sales and marketing spending because they are the primary customer acquisition costs, but they aren't the only ones. To determine CAC, include every expense associated with acquiring new customers, such as running free trials.
Calculating CAC helps your company gain a deeper understanding of the cost of acquiring each new customer. As a standalone metric, it doesn’t tell you much about your business. Where CAC really matters is in combination with other data points. CAC needs to be accurate because you’ll compare it with your customers' lifetime value (LTV) and your Magic Number to gain insight into where to spend or cut resources.
Here are the top reasons why calculating customer acquisition cost is essential for your SaaS company:
Your SaaS CAC offers valuable insight into what your data means going forward. This information can guide business decisions that help you save money and optimize spending on certain potential customers over others. For instance, you'll be able to tell which marketing strategies are working and which aren't.
Knowing your company's CAC is especially relevant for pricing your products. For instance, SaaS CAC pricing could be an issue if:
CAC for business growth also indicates the health of your sales and marketing teams. If you’re not spending enough on sales and marketing, you may be missing out on new customers who are ready for a solution like yours. In turn, if your sales and marketing spend is too high, it will be difficult to turn a profit. Calculating CAC puts a spotlight on these areas so you can maximize the effects of your spending.
Several other metrics make CAC even more valuable when comparing all the data. Many startup SaaS companies often spend substantial resources to acquire each customer. Knowing these metrics reveals how well your marketing and sales teams acquire ideal customers.
Here are two of the top metrics to compare with CAC for the best insights into your marketing effectiveness:
Utilizing CAC for business growth requires a good deal of data-gathering and analysis. Because every SaaS company is different, the final SaaS CAC calculation can depend on many things. In the SaaS industry, some of the most common factors that influence CAC include:
Here's the rundown on these factors so you have a better idea of what your CAC might look like:
Marketing a product in a higher price range could decrease your CAC, but it depends on how you strategize your marketing spend. This is where the optimal CAC SaaS benchmark of 3:1 enters the picture. The trick is to optimize marketing spend to acquire the most customers while ensuring customer profitability outweighs your CAC. On the flip side, SaaS companies must be wary of overpricing their products and services for their target market, which could repel potential customers.
Purchase frequency also factors into the CAC equation. If the average customer purchases your product every month, their CAC might decrease, meaning that your company receives a greater CAC payback for its investment in acquiring the customer.
Many SaaS companies calculate CAC monthly since their spending on marketing may vary per month. If you have a sales cycle longer than 30 days or acquire most customers through a freemium model, the CAC will not be accurate when analyzing month to month.
To combat this, we suggest analyzing a rolling three- or six-month average of your monthly CAC. Capturing the right amount of data in your CAC formula provides a more accurate picture of your CAC.
Another highly influential factor on CAC is customer churn, the percentage of customers or revenue a company loses over a given period. A customer has churned when they no longer have access to your product. Newer customers are more likely to churn than ones who have been with you for a long time, so understanding your churn gives you insight into the effectiveness of your marketing spend.
If your company's CAC is excellent but you have a high rate of customer churn, you'll have to spend more each sales cycle to make up for churned customers before you can acquire new customers for a net gain. Perhaps it's time to take a second look at your marketing strategies to see whether you're reaching those customers who will stick around.
CAC differs between businesses and industries for several reasons. Part of this variation is the difference between various industries' sales and marketing spend. Another factor is company maturity. Let's dive into these differences to better understand what your company might expect for its CAC:
A significant factor in the differences between customer acquisition costs is the type of customer the company hopes to acquire. The end customers of business-to-business (B2B) and business-to-customer (B2C) companies have different needs, meaning that marketing spending for these customers will look differently:
SaaS metrics for CAC also vary by the company's length of time in business. An emerging SaaS business with few existing customers may need to invest more upfront in marketing, trade shows, and other events or advertisements before they start making a profit. Usually, every sales cycle will bring more new customers. This initial investment can skew the CAC for emerging companies.
For example, if a new SaaS company attends a trade show to gain leads, they might expect to start seeing new customer acquisitions over the following months rather than right away. Established SaaS businesses may have a steadier stream of new customers because their sales and marketing spending is more regular.
So how do you make the most of your CAC to turn leads into loyal customers and increase your SaaS company's profits? Find out how to reduce CAC with these actionable tips:
Knowing who you're targeting in marketing is essential for lowering your CAC. With information about your range of potential customers, their price sensitivities, and what features they value most, you can pinpoint these customers and boost lead conversion.
Deciding which marketing strategies to utilize in your customer acquisition plan depends on your customer profile. Take note of your highest converting channels and focus on those. You can also optimize your marketing strategies with more cost-effective marketing options, like informative webinars and email marketing.
Enhancing your marketing team's performance is another proven strategy for reducing CAC. One way to do this is through A/B testing your tech stack and automation tools to see how well they perform. A/B test everything to get your team operating most efficiently.
As you optimize your marketing strategies, reduce marketing and sales spending that doesn't bring a profitable enough return. Cut “nice-to-have” tools that don’t make a big impact on lead conversion.
Making it easy for leads to become customers can also decrease your CAC. Strategies for simplifying the sales journey include offering discounts on annual billing, subscription renewal incentives, and customer referral programs. Consider combining steps of the process and only demoing to qualified buyers.
Giving customers what they want is a simple yet effective way to increase lead conversion. Conduct surveys to gather feedback from existing customers about product updates and features so you can create the most valuable product. Adding value is an excellent way to encourage customers to try your product and stick around longer.
Optimizing your conversion rate makes it more straightforward for your site visitors to become leads and leads to become paying customers. A conversion rate optimization (CRO) strategy includes improving your site's acceptance of mobile submissions, testing web copy, and simplifying the steps it takes to become a customer.
Understanding your company's CAC is essential for optimizing your marketing spending and closing more sales. Before you can get started, it's critical to have the right data at your fingertips. B2B SaaS companies need more than data collection — they need smart data synthesis and storytelling so they can gain insight and create strategies for growth.
At KPI Sense, our financial gurus help SaaS companies create their financial stories by assembling and making sense of their data. Our hands-on approach allows us to fully understand your company's financial data to calculate your key metrics and make your data useful. From there, you can share the information with investors and benefit from our ongoing guidance that boosts your B2B SaaS company's growth and supports you through challenges.
To learn all of the crucial metrics for your B2B SaaS company, download our “Metrics That Matter” e-book. If you're interested in learning how the KPI Sense platform can help your B2B SaaS company strategize and grow, schedule a chat with our team today to get started.