Customer acquisition cost or CAC is a key metric in any industry. But for SaaS business CAC is a core indicator that need to be analyzed, since the model depends on the lifetime value of the customer. When a SaaS company at an early stage acquire new customers, it takes them much time and money to see a full return on their investment. If you want your business to grow, you need to find out how many months of revenue from a customer are actually needed to recover these costs. A process of CAC recovering may take more time than you expected.
How to Calculate CAC?
The calculation is pretty simple. You need to take the sum of all your sales and marketing expenses over a given duration (including human capital costs) and divide it by the number of customers acquired in the same period of time.
Maksym Babych, who focuses on the Saas products, notes that SaaS founders should not ignore the key metrics. Understanding them is critical for their business, its success and profitability.
Usually, SaaS founders wait months or even years before enough cash is flowing in to recover CAC and generate profits. But it is crucial to develop a business model that ensures you can earn more money from your customers than it costs to acquire them.
How to Optimize a CAC metric?
If you want to lower a customer acquisition cost, you should understand that this task is challenging. There are such things as marketing expenses, employee salaries, time based costs, let alone traditional costs, that influence the level of CAC. But there are two steps to help you mitigate CAC and turn prospects into loyal, paying customers, who will bring profit to your SaaS business:
1. Quantify customer personas
While the Internet is full of articles that teach how to define your customer personas, the founders still neglect this stage. They usually think that a short brainstorming is enough to know their customer. But it’s a huge mistake. And it leads to another problem, they fail to quantify the range of customer personas they could serve at the initial customer development process.
2. Optimize your funnel
Sales and marketing funnel optimization is a process you can fully control, thus it isn’t a hard task to do. But you should take into account that to run an optimizing process efficiently you need to do it for the right customer. Don’t neglect the first step to redact the unnecessary processes.
Analyze and quantify each step of the process. It is very important to find out the number of visits resulting in generating leads, how many leads result in opportunities, and how many opportunities result in customers. If you focus on these aspects, you will be free to try various channels, sales practices and approaches.
While looking for the best solutions and practicing various approaches can help a lot, automation is still your key to success. There is a plenty of solutions that can be handy, like HubSpot, Help Scout, Salesforce and many others. Choose the best that works for you and what you need for each stage of your funnel and enhance your efficiency as much as possible.
Maksym Babych
Serial entrepreneur and SaaS professional. Founder and CEO SpdLoad
