When you are going to start your SaaS company, it can be tempting to get customers any way you can – regardless of the time, energy, and cost. However, suppose you are planning to run a successful and profitable business company. 

In that case, you will need to balance the total money you spent on marketing and sales efforts required to acquire customers or your customer acquisition cost.

The same principle applies whether you’re promoting your product or service through content marketing, paid ads, or marketers in your affiliate marketing program.

If you are too cautious about your customer acquisition cost, you may end up missing out on clients and future revenue. Even if you spend too freely, you won’t be able to cash much profit and are very likely to end up in Deadpool.

The challenge of customer acquisition cost or CAC is to spend the right amount to lure in new customers to your products or services without jeopardizing the Lifetime Value or LTV and revenue from that customer. It is known as LTV to the CAC ratio, and its the ”God Metric” of many SaaS companies in the market.

A successful SaaS business calculates CAC correctly and uses that information to optimize and quantify their marketing funnel. Not only that, but it will try to understand and master the art of balancing the relationship that CAC has with LTV. 

In this blog post, let’s take a look at why CAC is essential, how to calculate it, and the ways you can make your acquisition cost work efficiently to make sure that your SaaS business is in the successful lot.

Calculating customer Acquisition cost

Read more about: Everything you need to know about Customer Acquisition in 2020 and beyond

What is Customer Acquisition Cost?

As you must have guessed by now, customer acquisition cost is the total cost of marketing and sales efforts needed to acquire new clients. It is one of the most defining factors in whether your SaaS company has a viable business model that can be yield profits by keeping acquisition costs as low as you can scale,

In a successful business model, your CAC is sufficiently lower than LTV. If you are observing a higher CAC than LTV right now, don’t panic. CAC is like a seesaw that may experience some ups and downs. ”

Here we will show you some steps and give you some chunks of vital information to get your SaaS business on the seesaw’s right end.

How to calculate CAC

One can calculate the Customer Acquisition Cost by merely dividing the total cost of acquiring clients (it includes marketing and sales cost) over a given period by the total number of customers attracted over that time.

CAC formula

The formula for calculating Customer Acquisition Cost is:

CAC = (total cost of marketing and sales) / (number of customers acquired)

For example, if you spent $36,000 to attract 1000 customers for your online business, your CAC will be $36.

Why is Understanding Your CAC is important?

Customer Acquisition Cost can be take out as the direct reflection of your SaaS business’s success in the coming future. Almost every SaaS company put forth a lot of money and time before getting a return on their investment.

This metric will start to matter more and more as time passes and you begin to sum up the months it takes to recover from CAC and turn a profit.

Let us put it in this way!

In the early period of the acquisition process, your SaaS business spends money on marketing and sales. Then as some time passes, your customer starts to pay cash for your subscription services, and you eventually break even and get your money back on the initial investments. 

And then starts the magical period of your business where you’re rolling in the dough and netting profit from that customer until they decide to cancel (which we hope never happens)

More specifically, having an understanding of your Customer Acquisition Cost is crucial for three main reasons.

Helps optimize your LTV/CAC ratio to 3 or Higher

Every quarter you should manage your LTV to CAC ratio by optimizing marketing and sales output. You are ought to continually optimize your channel and tactics to ensure you are optimizing this ratio so that you are making a profit as big as humanly possible.

For a benchmark, you want this number to net out to at least three, it means for every dollar you put in your SaaS machine, you are getting three out.

Determining and Optimizing your Payback Period

As soon as you acquire a new client, you instantly lose money. This means the first thing on your list moving forward should be getting the upfront as much as possible.

You can think of the payback period as the succeeding layer of CAC in the fact that it reveals as much more in-depth look at how your business and channels as a whole are doing from an acquisition front, especially if you are employing a freemium model.

Tracking and Optimizing your CAC ratio

Oh yes, Customer Acquisition Cost goes much deeper than merely the CAC to what’s known as CAC ratio. This number is crucial to us because business aims to create a margin, not just as revenue.

Perse, the CAC ratio takes gross margin over customer acquisition costs and tracks it over time. 

What do you Include in CAC?

person thinking about customer Acquisition cost

Read more: Customer Acquisition Strategies for All Business Types including Startups

Customers you acquired and the cost of getting them. Customer Acquisition Rate depends on two factors:

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Sales and Marketing Cost 

Sales and Marketing cost includes three main parts – tools, salaries, and spend. Everything in these vertices should include while calculating CAC. 

You can think of it in this way, anything on your P&L, contributing to acquiring more customers should include. Keep in mind that you are trying to optimize your profitability. So you don’t want to disclude things that will hide your flaws in your strategy about customer acquisition. Or you can include items that are going to mask well how profitable you indeed may be in your acquisition.

Number of New Customer Acquired

You are going to conclude the count of new clients that you have managed to acquire. It is a bit more hotly contested because of the inclusion of ”Customer Success” in the SaaS business. 

Yet, Customer Success focuses on retention, which should be ever-expanding in terms of MRR/ARR. Customer Success focuses on the acquisition of SaaS.

What you Should not Include in CAC

There’s always been a heated debate in SaaS around whether you should include Customer Success costs while calculating CAC. 

In our experience sitting in and chatting with SaaS boardrooms, we typically see that the customer’s success never made a part of CAC.

It isn’t a reason for not including it in CAC, but when you think about customer success costs, their primary purpose centers around your expansionary revenue, not your new customers.

Sure, one can look at customer success as a part of the sales. Still, each part of the SaaS foundation as an individual axis to make sure optimizing each piece of the SaaS equation, rather just another responsibility of the sales team.

Furthermore, it does make much more sense to include customer success in the CAC ratio, not in pure CAC, because you target your acquisition teams’ efficiency independently.

3 Ways to Reduce CAC

The basic idea behind designing CAC is to have a metric measuring and maintain your acquisition team’s profitability. Your business could be regarded as viable if your costs to get the customer through the door are higher than your customer lifetime value. 

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The rule of thumb is to spend 33% or less of your average customer lifetime value.

Let’s put this information into action today. Here are the three most effective ways anyone can reduce their CAC and optimize for profit.

Optimize your Funnel

Quantify each step of your funnel, understand how many visits take to leads, how many leads turn into opportunities, and how many opportunities are convert into customers. The best way to do this is to apply the Balfour Method of the growth process to your funnel, ensuring proper mechanism in your channel.

Strengthen the effectiveness of Sales and Marketing Spend

Try taking a lean approach to marketing and sales expenses. Put money into the channels that have proven returns so that you are not wasting any more dollars.

Different Digital Marketing Agencies in Pakistan offer their services in this regard, and they have undoubtedly proven their metal in digital marketing and Ad campaigns.

Engage new Customers and Prospects Quickly

Cut down the time it takes to get new customers engaged with your product or services. The quicker product engagement per customer, the cheaper the acquisition costs become per customer.

End Words

Customer Acquisition Cost is pivotal for the success of any SaaS business. With the right strategies and thoughtful planning, it can be lowered, resulting in huge profits. 

Don’tDon’t waste your time and hurry up. Start working on balancing your LTV to the CAC ratio because this will set you apart from your counterparts.