SaaS Startup Cost of Customer Acquisition: Basic Strategies for Beginners
It’s always a challenge for any company to acquire new clients and grow its user base. And that sentiment is true for any SaaS startups company out there.
Increasing that challenge is the fact that the SaaS industry is becoming more and more saturated. Competition is fierce and just getting noticed amidst the sea of SaaS products is a challenge all by itself. And that’s not even factoring in the SaaS startup cost of customer acquisition.
Consider these statistics:
- It’s projected that the SaaS industry will grow to $99 billion between 2021 and 2025.
- In 2017, a report from Better Cloud said that 38% of companies are already running on SaaS products.
- Free trial customers are 70% more likely to convert to a paying client after reaching out to a SaaS rep.
- 86% of businesses using SaaS products are seeing higher employee engagement.
Given these numbers, it’s unsurprising that a lot of new SaaS companies are popping out like dandelions. Everyone wants a piece of that pie.
The question is: how can you differentiate yourself from the competition? What is the basic SaaS customer acquisition strategy anyway? And how much capital are you going to need to succeed in the space?
We know that all of these can be overwhelming. But similar to most things, it can be learned. You just need to be informed about the basics so you have a solid foundation moving forward.
So in this article, we’ll be looking at the SaaS startup cost of customer acquisition to help you prepare for your challenging yet rewarding journey ahead. We’ll also touch on other concepts like decreasing your acquisition cost and mistakes you should avoid.
Let’s dive right in.
Understanding SaaS Startup Cost of Customer Acquisition
Before anything else, let’s first define customer acquisition in the SaaS industry.
What exactly is it? And how can this concept help your business grow?
As the name suggests, the customer acquisition cost (CAC) is simply the amount you spend to obtain a client. While the SaaS CAC strategy has some similarities with traditional marketing, it has a few distinct differences.
The most prominent of which is the pricing model of the business.
You see, in traditional marketing, you only need to convince someone to buy your product and then you proceed to the next prospect once the purchase is completed.
Of course, it’s still a good idea to nurture that customer to get them to buy again. But the overall approach is to follow the AIDA method.
A SaaS company is different.
After acquiring a client through AIDA, you’ll need to do everything you can to retain them as you have a subscription-based payment model.
The longer your client stays with you, the higher the profit you’ll generate. This is called the customer’s lifetime value (CLTV).
As you may have guessed, the profit you earn from a certain client needs to surpass the CAC you spent acquiring them in the first place. It’s this CAC/LTV ratio that dictates the success or failure of a SaaS company.
SaaS Customer Acquisition Cost Calculation
To calculate the said ratio, you simply need to divide the overall sales and marketing costs (ads, salary, tools used) over the number of clients you acquired within a particular marketing timeframe. For instance, let’s say you launched a campaign worth $1,000.
When the campaign ended, you managed to acquire 10 new customers. That means your SaaS CAC is $100.
Now, you’ll need to recover that $100 for each client as soon as possible. However, considering most SaaS products follow a subscription-based model, the client is going to fulfill that $100 payment over time.
That means you’ll need to ensure they stay long enough for you to recover that initial investment. Or better yet, turn a profit. This payback period is critical to the growth of your SaaS company.
So the question now becomes: how long should this payback period take?
Well, according to serial entrepreneur David Skok, your payback period should be about 12 months. Maybe even less to accelerate your SaaS company’s growth.
You’ll also need to consider how much money you’ll spend on your CLTV/CAC ratio. While this can vary depending on the pricing of a SaaS product, a good benchmark to follow is the 3:1 ratio.
Put simply, the 3:1 ratio dictates that you should spend 33 percent or less on your CAC based on the overall CLTV.
So if your CLTV is $300, your maximum expenditure on your CAC should be $100.
Again, decreasing this expenditure will hasten the expansion of your SaaS company.
But wait, always remember to stay close to the 3:1 rule.
For instance, if it changes to 1:1, then you are losing money the more you sell. If it increases to 5:1, you are restricting growth.
This is because the number indicates you aren’t spending enough capital on the acquisition cost to get more clients.
So stay within the boundaries of the 3:1 or 4:1 ratio. Anything less or more than that number should be raising alarm bells in your boardroom.
Reducing your CAC to Increase Your Profit
Now that we have a basic idea of how to calculate our customer acquisition cost, let’s look at how we can decrease it.
1. Closing the right SaaS clients
This is one of the most common mistakes among new SaaS businesses. Yes, closing a deal is important. But if you’re adding customers that aren’t the right fit for your product, then you’re going to increase your churn rate.
Customer churn is the rate at which you’re losing clients in a particular period. Remember, even if you have a low CAC and you have a high churn rate, your business will go eventually go belly-up.
So always attract clients that can truly benefit from your SaaS business. Doing so will ensure you have an effective monthly/yearly recurring revenue. It’ll also add longevity to your CLTV.
After all, if your product can truly help their business grow, why would they leave?
2. Creating a comprehensive customer avatar
A customer avatar is a fictional representation of your ideal customer. For a SaaS business, that means it’ll embody someone who makes the final financial decision in the company.
Here’s an example.
Steve is a chiropractor who recently expanded in the digital space to capture more clients. He wants to boost his ranking on the SERP (search engine result page) to increase brand awareness and create more leads.
Steve’s age is between 30-50 years old. He’s married with two kids and is living in Los Angeles. He’s pretty new to the online marketing world although he’s eager to learn the ropes. Steve isn’t a fan of social media but is slowly seeing its potential for SaaS businesses that want to increase audience engagement, among other things.
This is just a brief example. The more details you add to this potential customer, the more you’ll understand how to connect with them. And the stronger this connection is, the higher your customer lifetime value becomes.
What’s more, your SaaS sales rep development team won’t waste their time on clients that won’t produce long-term revenue.
So always pay attention to this factor if you’re a SaaS startup.
3. Mapping out your CAC
Calculating your CAC is pretty straightforward. Unfortunately, a lot of startup SaaS companies often blunders this formula. And that stems from failing to add the necessary details in the first place.
These details should include:
- Ads (social media, Google AdWords)
- Marketing costs (keyword research, content marketing, website design, content management system)
- Salaries (sales development rep, account executives, sales director)
Each of these factors should be considered so your formula is accurate.
Failing to include even a single data on these factors will result in skewed numbers. And skewed numbers will affect your monthly/quarterly/yearly revenue projection.
4. Conduct demo quickly and efficiently
All effective SaaS sales reps out there conduct their demo quickly and efficiently. But how do they do it?
Here are several points to remember:
- Conduct proper research before the demo – company size, platforms they favor, customers they’re trying to acquire.
- Tell the prospect what to expect during the demo – this will give the prospect an overall idea of what you’re going to be tackling.
- Ask questions – what specific problems are they trying to solve, what did their previous software lack, is there a criterion they’re trying to follow?
- Focus on the value that will help the prospect – do not show off every bell and whistle of the product. Instead, focus on the features that could help streamline and improve their daily operations.
- Identify a problem and use your SaaS product to solve it – once your prospect has highlighted a problem, use your product’s features to address it. This can generate excitement for your client and give you an edge when it comes to payment structure.
An efficient demo ensures that your SaaS sales rep is allocating their time effectively.
As a result, they can perform more demos for other leads.
Remember, the salary of your SaaS sales rep is included in your CAC. So the more efficient your process is, the less you’re going to spend on that front.
5. Marketing automation will save your SaaS Business
Marketing automation has the capability of enhancing your overall operations. And again, automating your marketing process will take some of the pressure off your SaaS sales rep team.
Here are some ways it can improve your SaaS company:
- Increase conversion of leads into sales
- Makes email targeting more personal
- Improving synchronization between your sales and marketing team
- Improves data analysis
- Gives you more opportunity to upsell to your existing customers
- Reduce human intervention for lead conversions
6. Conduct regular A/B tests
Successful SaaS companies are always looking to improve their existing process. And to do that, they’ll religiously perform A/B tests.
These tests include a host of elements including:
- Home pages, landing pages, sales pages
- Emails – open rates, click-through rates, length, subject lines
- Call to Actions (CTA) – CTA’s location, how often it appears on the page, color scheme, size of the CTA button
- Trial process – measure the effectiveness of your in-app tutorials, video length, training academy, and more.
- Website content – evaluate how your audience responds to the types of content you’re publishing. Do they like long-form, how-to guides, in-depth analysis?
These are just some of the variables you can measure to improve your entire marketing funnel.
Do not remain static. This is especially true in the SaaS industry where trends can change on a whim.
7. Keep your free trials short yet comprehensive
If you’re a SaaS company offering a free trial period, you should only offer your freemium model for a maximum of 30 days. But even this is being contested in the SaaS industry.
Close CEO Steli Efti said that 99 percent of B2B SaaS companies should only offer their trial period to 14 days at the most. Efti argued that the shorter your trial period is, the shorter your SaaS sales cycle is going to be.
That makes sense since the SaaS sales cycle typically lasts around three months.
That’s a long time to be chasing someone who could potentially turn into a customer. And that customer needs to stay with you for a certain number of months to get back your SaaS CAC.
That’s why it’s not enough to only create leads and convert them. You’ll need to truly get customers who will benefit from your product.
In turn, once they see the value you’re providing, they’ll stay with you for years. That means more money coming in, and more money being redirected to the expansion of your business.
Designing Your SaaS Customer Acquisition Cost Strategy
Creating your SaaS customer acquisition cost approach can take a lot of elbow grease. But the effort is more than worth it once everything is in place.
To recap, your CAC should strictly monitor these two elements:
Your CLTV (customer lifetime value) should be three times the amount you spent on your CAC (customer acquisition cost).
You should recover your CAC in 12 months or sooner.
Following these two will inform you how to move forward in the coming months.
Remember, always try to accelerate your company’s growth so your competitors won’t see you coming.
Once they realize your presence, you’ve already established yourself as one of the pillars of your particular SaaS niche.
For more information about SaaS data, metrics, and strategies, read more on our marketing blog.