What Is CAC In SaaS:
How To Compute & Use CAC To Grow Your SaaS Business
The key to the growth of any business is attracting and winning new customers.
Although customer retention is equally (if not more) important than customer acquisition for the SaaS business model, the latter is what fuels exponential growth. Especially for SaaS startups.
Now, getting new customers is not free. It costs money and time to find, attract, and convert them into paying customers.
This expense is what we call the customer acquisition cost or CAC.
So what is CAC in SaaS?
In this blog post, we will answer that question, along with why it is important and how to use it to make data-driven decisions for your SaaS company’s sustainable growth.
What Is Customer Acquisition Cost?
The customer acquisition cost (CAC) is the total amount of money that a company spends to acquire new customers.
For SaaS businesses, this could include costs like:
- Content marketing costs (agencies, freelancers, etc.)
- Sales and marketing tools (SEO tools, marketing software, CRM, etc.)
- Marketing team salaries
- Sales team salaries and commissions
To calculate your CAC, simply divide your total sales and marketing expenses in a given period of time by the number of new customers acquired as a result of those efforts.
For example, if your company spends $100,000 on sales and marketing in a month and acquires 100 new customers, your CAC would be $1,000.
Why Is It Important To Track CAC?
As a SaaS business owner or decision-maker, it is important to track your company’s CAC for a few reasons:
It Measures The Effectiveness Of Your Customer Acquisition Strategies
Your CAC will give you a clear picture of how effective your customer acquisition strategies are.
If your CAC is low, it generally means that you are efficiently acquiring new customers and your sales and marketing efforts are working well.
On the other hand, if your CAC is high, it could be an indication that you need to re-evaluate and optimize your acquisition strategies.
Still, there are exceptions to those statements. That’s why CAC is often used alongside other SaaS metrics to see a bigger picture of how well you are using your sales and marketing spend.
We’ll talk about that later in this article.
It Helps Compare The Efficiency Of Your Customer Acquisition Channels
When you track your CAC, you will also be able to see which customer acquisition channels are working best for your business.
For example, if you are using a mix of paid and organic marketing channels (e.g., Google Ads, SEO, social media, etc.), you will be able to see which ones have the lowest CAC.
This information is valuable because it allows you to focus your resources on the most effective acquisition channels and double down on what’s working.
It Can Attract Investors
If you are running a SaaS startup, one of your best bets for hypergrowth is to attract investors.
And having a low CAC can come in handy towards that goal.
That’s because early-stage investors want to see that you are efficiently using the funds they provide to grow your business. And one of the best ways to show this is by having a low CAC. Or more specifically, a low CAC compared to other metrics that measure your revenue.
How To Use Customer Acquisition Cost To Make Data-Driven Decisions
Now, let’s talk about how you can use this metric to make data-driven decisions for your business.
There are a few best practices that you should keep in mind:
Find The CLV:CAC Ratio
As we mentioned earlier, CAC should not be looked at in isolation but rather alongside other metrics to get a holistic view of your company’s performance.
And one of those metrics is the customer lifetime value or CLV.
CLV is the total amount of money that a customer will spend on your product or service over the entire course of their relationship with your business.
To find your company’s CLV:CAC ratio, simply divide your customer lifetime value by your customer acquisition cost.
This number will give you an idea of how much revenue you can generate from each new customer.
In fact, it literally tells you how much revenue you are earning for each dollar you spend on customer acquisition.
For example, if your CLV is $3,000 and your customer acquisition cost is $1,000, your CLV:CAC ratio would be 3:1.
This means that for every dollar you spend on acquiring a new customer, you are earning $3 in return
Ideally, you want your CLV:CAC ratio to be above 3:1. This is the standard ratio for SaaS businesses.
But what if you have a CLV:CAC ratio of 5:1 or more? Does that mean you should aim to take it even higher?
Having an overly high CLV:CAC ratio (5:1 or more) might mean that you’re missing out on potential growth.
Sure, you may be getting a lot of returns for your investment. But what if you could earn even more?
If you do get a CLV:CAC ratio that is more than 5:1, you could see it as an opportunity to invest more in customer acquisition and still generate a healthy return on investment.
Compute Your CAC Payback Period
Another SaaS metric that is often used alongside CAC is the CAC payback period.
The CAC payback period is the amount of time it takes for you to generate enough revenue to cover your customer acquisition cost.
Ideally, you want your payback period to be as short as possible. This means that your customers are generating enough revenue quickly to offset the costs of acquisition.
For this metric, you will need to stack your CAC against your average revenue per user or ARPU.
The ARPU is exactly how it sounds: the average amount of revenue that you generate from each customer. So you may want to prepare a spreadsheet for this.
To calculate your CAC payback period, simply divide your CAC by your ARPU.
For example, if your CAC is $1,000 and your monthly ARPU is $100, it would take ($1,000/$100) = 10 months to recoup the costs of acquisition through revenue.
A shorter payback period is generally better since it means that you are generating revenue from your customers more quickly.
But what’s considered a “good” payback period?
This really varies from business to business. But as a general benchmark, most companies aim for a CAC payback period of 12 months or less.
However, it’s normal for SaaS startups to take around 15 to 18 months to recover their CAC.
This is because they are still in the early stages of growth and need to reinvest their profits back into the business to fuel further growth.
Still, that doesn’t remove the risk of ending up with an excruciatingly high burn rate.
This is where investors can give you a huge advantage. As long as they don’t mind a longer CAC payback period, that is.
Set A Distinct CAC For Each Customer Segment
Remember, your customer base is not homogenous. There will be different types of customers with different needs and pain points.
So if you need deeper insights into your customer acquisition efforts, you need to segment your customers and set a distinct CAC for each group.
This way, you can track which segments require more CACs than others and then optimize your budgets for your targeted marketing and sales campaigns.
For example, if you’re selling to an enterprise market, you might need to set a higher CAC for larger businesses since they require more effort and longer sales cycles to land.
On the other hand, if you’re targeting small to medium-sized businesses, your CAC will most likely be lower since they’re generally easier to win over. In fact, a product-led growth model may even work best for this market.
By understanding which segments require more CACs, you can focus your efforts on those that have the highest potential return on investment.
Only Account Costs For Winning NEW Customers
The implication of the word “acquisition” in “customer acquisition cost” is that it is a new customer bringing in new recurring revenue.
This means that you shouldn’t include costs that are related to retaining or upselling your existing customer base.
For example, if you’re running a loyalty program to keep your customers engaged, the cost of that program should not be included in your CAC calculation.
The reason for this is that the loyalty program is not acquisition-related. It’s designed to keep your current customers happy so they stay with you (and spend more money).
The same goes for other customer success initiatives like customer support, onboarding, etc. These activities are important, but they’re not acquisition-related.
Consider Team Members “Wearing Multiple Hats”
It’s normal (or sometimes even necessary) for a fledgling SaaS business to have team members who are “wearing multiple hats”, or taking on multiple roles at the same time.
And sometimes, a team member who has roles in customer acquisition may also have certain responsibilities in customer retention.
For example, a salesperson may be responsible for generating new leads, qualifying them, and then closing the deal.
But after the sale is made, they may also be responsible for onboarding the customer and helping them get started with using the product.
How would you account for your CAC then?
In cases like these, you could track the time they spend doing these tasks and then allocate the cost accordingly.
For example, if they spend 50% of their time on customer acquisition and the other 50% on retention, you could then allocate 50% of their salary to CAC.
This way, you would get a more accurate picture of your true CAC.
Amortize Big One-Time Expenses Over Time
Some customer acquisition costs are one-time expenses that can’t be avoided.
For example, if you’re running a booth at a trade show, you would need to pay for the booth rental, travel expenses, and so on.
What’s more, the leads you generate on that trade show might take weeks or even months before they’re ready to buy from you.
In cases like these, you would need to amortize the cost over time.
This means that you would spread out the expense over a period of time (usually 12 months) and then include it as part of your CAC calculation.
For example, let’s say you spend $60,000 to participate in a trade show in January. Then let’s say your average sales cycle length is 12 months.
Cost amortization would mean spreading that expense out over the next 12 months.
This would give you a monthly CAC of $60,000/12 = $5,000.
By doing this, you would get a more accurate picture of your monthly CAC instead of having a big spike in your CAC calculation for a single month.
Final Thoughts About Customer Acquisition Cost
As a SaaS business, it’s important to track your customer acquisition cost so you know how much you’re spending to acquire new customers.
This number is especially important if you’re planning to scale your business. By understanding your CAC, you can make more informed decisions about where to allocate your resources.
What’s more, tracking CAC can also help you identify ways to reduce your costs and improve your ROI.
Still, the CAC by itself doesn’t give you a complete overview of your profitability. That’s why you need to use it with other SaaS financial metrics, such as your CLV and CAC payback period.
When used together, these numbers will give you a much clearer picture of your business’s health and what you need to do to improve it.
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