Eliminating the unknown and replacing it with data
A Quick Guide to Understanding CAC Metric
Most Saas Companies, if not all, focus on getting as many customers engaged as possible. That means looking at the SaaS conversion rate. And while that is the right thing to do, your company spends more time figuring out sales and marketing strategies to increase recurring revenue and forgets about calculating the customer acquisition cost. CAC in marketing and sales is essential. If you are cautious about this metric, you might lose qualified leads. If you are not careful enough, your marketing costs and sales expenses will go through the roof. So, taking a close look at your customer acquisition cost and understanding how to calculate CAC is essential for your SaaS business.
Basically, if your CAC is too high, then you are spending too much money on acquiring customers, which can’t do your business any good. After all, your acquisition costs should not be above your profit. Entrepreneurs operating in multiple, different fields are working tirelessly to make sure they lower their CAC levels as much as possible, as the less it costs for you to gain a customer, the healthier your business is. You need to take into account that alongside the new customer expenses, your business has other bills that need to be paid. In other words, your goals need to eventually shift from gaining customers to retaining old ones so these can start bringing in new ones. Your customer base needs to turn into a free of charge new customer source. Retaining customers should become your major long-term concern.
OK, so far so good, but how can you figure out the actual value of your CAC? Like all metrics, you do require a formula to adequately calculate CAC.
You need to first identify the elements part of your formula. A set, clear period must be considered, otherwise calculating CAC might prove to be impossible and rather inconclusive. Once you have the period, you need to look at marketing and sales cost and divide them by the number of customers acquired in that period of time we were talking about. You see? Everything comes together really nicely.
So, let’s recap, shall we?
CAC over set period of time = MSCosts ( Marketing + Sales Costs)/ AC (Acquired Customers)
What is the Customer Acquisition Cost (CAC)?
A crucial metric in determining whether or not your SaaS company is successful is CAC, short for Customer Acquisition Cost. Through this metric, you can calculate if your customer cost per acquisition is above or below how much revenue you gain. If your user acquisition cost is $10 and their monthly subscription plan is $5, your business is not looking good. The cost of obtaining a new customer should never be above your profit.
Successful companies are working tirelessly to make sure they lower the amount of money spent on acquiring users, as the less it costs for you to retain a customer, the greater the profit margin will be.
How to Calculate the Customer Acquisition Cost
Like any other metric, there is a customer acquisition cost formula you can use to determine how much you are spending on acquiring customers.
CAC rate = ( Marketing + Sales Costs ) / Acquired Customers
Now, when calculating CAC, you will need to look at a specific period. The customer acquisition cost formula uses your sales and marketing investments from a particular time frame and the number of new customers from the same period.Top 3 Reasons Why CAC is Important
The CAC calculation is essential for any SaaS or Software company because it allows them to adjust their marketing campaigns. When used wisely, the CAC formula can be regarded as a steering wheel in balancing your efforts to attract potential customers. Now, let’s understand why this metric is relevant to your business.
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Streamlining the decision-making process
Your sales and marketing efforts revolve around the idea of building a functional & efficient sales funnel that can increase recurring revenue by keeping potential customers engaged and turning them into qualified leads. But that is the result of several decisions. And it’s a known fact that the decision-making process is no walk in the park. You might be running multiple social media ads to better communicate with your target audience, generating costs. It’s no use to you if your ads are performing if the marketing expenses surrounding them are just as high. So, for the sake of your SaaS business, use the customer acquisition cost formula to have your expenses revealed, and use that number to simplify your decision for the next quarter. -
Pinpointing the most efficient customer acquisition channels
Understanding how to determine the customer acquisition cost will take you to the next phase of the process, optimizing your marketing spend. Your goal will be to improve customer acquisition costs, which means finding the most prolific source or marketing channel to acquire customers. Tracking your CAC cost could reveal, for instance, that your social media marketing efforts are far better in terms of expenses and bringing in new customers. And based on your findings, you could optimize your budgets. -
Know your payback period
The meaning of CAC in marketing is more significant than expected. Once you calculate CAC, you know how much you have invested in obtaining more customers. Why is this important? Based on the total cost, you can establish how much each paying customer should bring to your business so you can eventually offset your investment. It’s all about recovering customer costs and achieving higher profit margins. Additionally, you can prioritize requests based on the CAC ratio, and the revenue your users are generating.
The 4 Easy Ways You Can Optimize CAC
Let’s try to answer the following question, first.
What is a good CAC rate? CAC is not the type of metric you can escape. All businesses have it. However, there are certain reference points you can use to guide you. When it comes to the cost of obtaining a new customer, you will also need to look at the customer lifetime value, also known as LTV. CAC is directly connected to LTV. So, a good LTV to CAC ratio is 3:1. If the average customer value is $3000, then the acquisition cost should not go over $1000, for example.
Keeping CAC as low as possible is necessary, that is if you want to make a profit. Luckily, there are strategies that can help you cut down your costs.
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Strategic Customer Relationship Managemen
Establishing strong relationships with the customers acquired can have a surprising effect on your CAC SaaS ratio. With the help of your customer experience SaaS teams, you can strengthen your relationships with customers, and increase their LTV. While you are not working directly to improve customer acquisition costs, you are still boosting your profits, specifically the expansion MRR. -
Optimizing your Pricing Strategy
When you calculate customer acquisition cost, you add all sorts of expenses part of sales process. So, why not optimize how you price Saas products and include these costs in the form of trainings or integration process? Value-based pricing is an option in his regard, bringing forward the value of the product rather than its specific features. Whatever technique you go for, understanding how you price Saas correctly is essential. -
Shorten the customer acquisition process
The longer it takes for you to engage customers and convert them into paying users, the higher your CAC ration will be. So, together with your acquisition teams, try to simplify and speed up the process and this way, use resources. Think of how you can automate your marketing campaigns. -
Create a referral program.
Focus on obtaining new customers through your existing ones. Use incentives to seal the deal. It’s better to invest in your already constructed client database and let them do the hard work for you. Surely, with a few good incentives lined up, they will be motivated to get the job done and you will see a significant improvement in your total sales numbers. Loyalty programs work very well, especially in the subscription business model.
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