An average SaaS business spends 92% of their first-year revenue on customer acquisition. In other words, it takes 11 months to pay back their customer acquisition cost.
CAC is crucial for every business, but analyzing it is even more vital to SaaS companies because the industry depends on the lifetime value of the customer. As a SaaS business owner, you wouldn’t want to acquire a customer who is likely to have a high lifetime value but costs just as much to sell to.
CAC (customer acquisition costs) refers to the total amount you spend to acquire a new customer – including all the sales and marketing expenses that you pay to get those customers.
In this article, I will explain why CAC is important, the CAC benchmark for SaaS, and how to calculate your CAC. I will also tell you which SaaS metrics to track and how to reduce your customer acquisition cost. Let’s get started!
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Why Is CAC Important?
The customer acquisition cost indicates how much time it will take to generate profits from each customer. CAC also helps measure the effectiveness of your marketing strategies.
Here are some of the top reasons why CAC is important for SaaS businesses:
- It helps you find the best customer acquisition channels and tactics.
- It enables you to manage your revenue and expenses more efficiently.
- If you track CAC consistently, you can gain tremendous insights into multiple drivers of your business model, such as pricing effectiveness, churn rate and customer success.
- When you know the cost to acquire a customer and how it relates to the value of the subscription, you can scale your SaaS business more effectively.
- It makes it easier for you to improve your business model and company value.
What Is a Good CAC Ratio for SaaS?
A good CAC ratio for your company depends on the customer lifetime value of your business.
CAC and LTV (customer lifetime value) go hand in hand:
- CAC indicates the cost to acquire a customer
- LTV predicts how much a client will be worth to your company over time
The industry benchmark for the ratio of LTV: CAC for SaaS companies is 3:1.
You should aim for a 3:1 or higher ratio to stay profitable. However, if the ratio is too high (5:1 or more), then chances are you are under-spending in the acquisition process and restraining growth:
Hence, if you spend $5,000 to acquire a customer, you should aim to earn at least $15,000 from each of them.
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How Do You Calculate Your CAC?
To calculate your CAC, divide the total sales and marketing expenses with the total number of customers acquired within a specific period.
Your sales and marketing expenses should include everything related to it, such as:
- Monthly spend on paid advertising
- Content marketing costs
- SEO and marketing tools (if any)
- Salaries of sales and marketing team members
For example, if your sales and marketing expenses for this month is $5,000 and you acquired 25 new customers, your CAC will be:
CAC = 5,000/25 = $200 per customer.
You can calculate the time required to recover CAC by dividing the CAC with the difference of monthly recurring revenue and the average cost of service.
For example, if your average monthly recurring revenue (MRR) per customer per month is $100 and the average cost of service (ACS) is $60, then the time required to recover CAC will be:
CAC payback period = 200/(100-60) = 5 months
To calculate LTV (customer lifetime value), divide the average revenue per customer by average churn rate.
For example, if your gross margin per customer is 40% and the average churn rate per month is 6%, your LTV will be:
LTV = (100*40)/6 = $666.66
Thus, your LTV: CAC ratio will be 666.66/200 = 3.33:1, which is above the industry benchmark.
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Which SaaS Metrics Should You Track?
Tracking the right metrics allows you to make data-driven decisions and grow your SaaS business rapidly. Here are the seven key metrics related to CAC that every SaaS business should be tracking.
1) Unique Visitors
Unique visitors indicates how many new individuals visited your website in a given period. Tracking the number of unique visitors is crucial because it shows how effective your marketing strategies are in attracting new leads.
You can check the number of unique visitors in your Google Analytics. Here’s how:
- Step 1: Open Google Analytics
- Step 2: Click on the “Audience” tab on the left-hand side
- Step 3: Click on “New vs. Returning” under “Behavior”
You will then see the total number of new and returning visitors, as shown in this image:
The behavior metrics, such as bounce rate, pages/session, and average session duration, are also crucial as they indicate how interested your new visitors are in your services.
2) Lead-to-Customer Rate
While monitoring new visitors shows how well you are attracting potential customers to your website, the lead-to-customer ratio indicates how many of them are likely to convert.
Measuring the lead-to-customer rate is crucial because if you aren’t generating enough sales-ready leads, you are probably wasting your marketing budget. In other words, it shows whether your sales processes and lead-nurturing methods are effective or not.
To calculate lead-to-customer rate, take the total number of customers for any period, divide it by the total number of leads, and multiply it by 100.
For example, if you acquired 10 customers in a month with 500 leads, your lead to customer rate will be:
Lead to customer rate = (10/500)*100 = 2%
The average conversion rate for SaaS is between 3-5%, while a strong conversion rate is anything above 8%.
3) Customer Churn
The customer churn rate shows you how many customers you have lost in a specific period. Measuring it is critical because even if your CAC is low but the customer churn rate is high, you will likely fail in the long run.
SaaS companies with month-to-month contracts see an average of 14% customer churn rates. You can see your customer churn rate by comparing the number of repeat customers between two time periods.
When tracking the churn rate, dig deeper than just the customer count. Identify the personas of customers who failed to renew as well as their industry or anything unique related to them that can help determine why they churned.
Share this information across departments, including sales, marketing and customer success, to create customer retention strategies. While it isn’t practically possible to retain 100% of your customers, try to lower the churn rate as much as possible.
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4) Revenue Churn
Since most SaaS businesses have variable subscription plans, it is crucial to measure the revenue churn alongside customer churn. The customer churn rate might vary from the revenue churn rate if some clients pay more than others.
Measuring your revenue churn rate also helps determine how many low-tier, medium-tier and high-tier customers failed to renew. If you see a trend (e.g., a lot of medium-tier customers churning), it’s time to figure out the actual reason behind it.
One simple way to do this is by sending questionnaires to the customers who have churned via emails.
5) Net Monthly Recurring Revenue Growth Rate
The net monthly recurring revenue growth rate measures the increase in the month-over-month percentage in MRR. If your CAC is increasing but your net MRR is constant, you will likely see a rise in expenses and a reduction in profits.
The net MRR growth rate shows how quickly your SaaS company is growing. Here’s how to calculate the net MRR growth rate:
- MRR = Average revenue per account * total number of accounts that month
- Net MRR = Existing MRR + New business + Reactivation – Churn – Contraction
- MRR Growth Rate = [(Net MRR Month B – Net MRR Month A) / Net MRR Month A] * 100
For example, if your average revenue per account is $1,000, and the total number of customers in the previous month is 100, your net MRR growth rate will be:
MRR = 1,000*100 = $100,000
Let’s say that in a given month you acquire 15 new customers and 4 reactivations, but 6 clients churned and 2 lowered their monthly plan (from $1,000 to $500).
Net MRR = 100000 + 15,000 + 4,000 – 6,000 – 1,000 = $112,000
MRR Growth Rate = [(112,000 – 100,000)/ 10,000] * 100 = 12%
6) Free Trial-to-Paid Customer Rate
The free trial-to-paid customer rate helps track how effective your sales strategies are in getting users to upgrade from free to paid.
There are three common types of free trial models in SaaS:
- Freemium: In this model, you offer customers a limited version of your product for a lifetime. Examples of SaaS companies with a freemium model are Slack, Grammarly and Dropbox. The average free-trial-to-paid-customer rate of the freemium model is 4-30%.
- Free trial (no credit card required): In this model, you offer a limited-time free trial of your product to customers with only their name and email address. Examples of SaaS companies with a free trial model (no credit card required) are Drift, HubSpot and Basecamp. The average free-trial-to-paid-customer rate of this model is 8-10%.
- Free trial (credit card required): In this model, you allow customers to access your product for free for a limited time only when they provide their credit card information. This increases the chances of commitment to your product at the end of the free trial. Examples of SaaS companies with a free trial model (no credit card required) are Netflix, Moz and Ahrefs. The average free trial to paid customer rate of this model is 25%.
To calculate your free-trial-to-conversion rate, divide the total number of free trials converted in a month by the number of free trials that ended in that period, multiplied by 100.
For example, if 100 customers converted at the end of their free trial in this month and 1,000 free trials ended overall, then your conversion rate is:
Free trial to conversion rate = (100/1000)*100 = 10%
If you have a low free-trial-to-paid-customer rate, determine why users are not paying for your product. Is it because it’s too expensive? Or is it that they weren’t able to understand how to use your product? Or something else? You can get an answer to this question by sending surveys to users who didn’t convert at the end of their free trial.
7) Net Promoter Score
The net promoter score determines how satisfied your customers are. It is also a metric to evaluate the effectiveness of your customer support teams.
Your NPS shows how likely customers are to recommend your product to their friends and colleagues. Measuring the net promoter score is crucial because your CAC will reduce significantly if your NPS is high.
To calculate the NPS, ask your customers these questions:
- How likely are you to recommend our SaaS product to someone else on a scale of 0-10 (where zero means highly unlikely and ten means highly likely)?
- How satisfied are you with our product on a scale of 0-10?
- What do you think could be improved in our product?
9 Ways to Reduce Your Customer Acquisition Cost
Now that you know what CAC is, why it is important, how to calculate it, and other metrics that you should be tracking, let’s take a look at nine ways to reduce your customer acquisition cost.
1) Optimize Your Customer Persona
Your customer or buyer persona defines who your ideal customers are: It includes your target audience’s demographics, pain points, and what encourages them to purchase, among other things:
If you are new in the business, create a buyer persona that matches your target and optimize it over time.
If you already have a buyer persona in place, use customer data to optimize it. For example, if your existing buyer persona says that your ideal customer is someone who earns more than $250K, but your existing client base consists of people who make more than $400K, you should update your buyer persona with this information. Doing so enables you to improve your marketing efforts and target those who are more likely to convert.
Get your sales, marketing and customer support team together to find more details about your existing clients. Each department has specific customer insights that can help you optimize your buyer persona.
2) Identify Points of Friction and Eliminate Them
Friction points are anything that drives potential customers away. There could be more than one friction point, such as a slow-loading site, no free trial, missing features or the absence of 24/7 customer support.
The best way to identify points of friction is by directly asking your customers. Create feedback surveys at each major touchpoint of the customer journey. You can even consider emailing feedback surveys to prospects who entered your sales funnel but bounced back without converting.
Here are some questions a SaaS company should ask in the feedback survey:
- Are there any concerns that need to be addressed before you subscribe?
- What made you leave the sales process before converting?
- Is there anything that we could have done better?
- What were you expecting from us when you chose to sign up for our services?
- Is there anything that would make you happy and more likely to convert, such as discounts, immediate customer support, etc.?
Another way to identify friction points is by integrating a customer experience management tool. They are built specifically to monitor the user experience across your website and other channels.
Additionally, analyze the least-used features in your product. Chances are your ideal customers don’t want these features, or they aren’t as effective as they would want them to be.
Once you determine all the friction points, make the effort to eliminate them to increase your conversion rate and lower your CAC.
3) Reduce Dependence on Paid Advertising
It is very difficult to reduce your CAC if your SaaS business is dependent on acquiring customers via paid ads. The ROI of paid advertising is linear. Therefore, it is essential to leverage other marketing strategies, such as SEO, social media marketing, and email marketing.
Here are some great ways to reduce dependence on paid advertising in order to acquire customers:
- Ensure that your website’s technical SEO is on point. Use tools like SEMrush to conduct site audits to determine what’s preventing your website from ranking.
- Conduct keyword research to identify the terms that your customers are using to search for your product. Incorporate those phrases on your website to increase your chances of appearing at the top of the SERPs.
- Get your SaaS product on top third-party review sites, such as TrustPilot, Capterra and G2 CROwd. Many customers read product reviews before purchasing software.
- Send personalized emails to your subscribers and non-paying customers to encourage them to convert.
- Build your presence on different social networks. Use social listening tools like Hootsuite to find out what people are saying about your product. This enables you to better address their concerns and capitalize on it.
Top SaaS businesses, like Salesforce, Mailchimp and Netflix, have a robust marketing strategy. They appear on the top of the SERPs for hundreds of industry keywords, thereby increasing the chances of converting leads organically. They also have a strong presence on various social networks.
For example, Mailchimp shares what’s new in their tool on Twitter to reach their ideal customers and increase conversions:
Mailchimp also uses social media to gather feedback about their product and improve it. They address queries on Twitter within hours, which shows how great their customer service is, which, in turn, can entice prospects into converting:
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4) Explore New Lead-Generation Methods
Once you reduce your dependency on paid ads, you’ll want to find new cost-effective ways to generate high-quality leads. This allows you to reduce your CAC while ensuring a continuous flow of leads to your SaaS business.
Here are some great cost-effective lead-generation methods for SaaS businesses:
- Leverage referrals: Your customers are your biggest assets. Create a referral program to encourage them to recommend your SaaS product to their friends and colleagues. For example, Airbnb offers its customers promotional coupon credits toward future bookings when they get their friends to sign up on the platform. This strategy has allowed Airbnb to receive 300% more bookings:
- Start guest blogging: Sharing valuable content on industry-specific publications can boost your brand awareness and build your company’s authority.
- Partner with established brands: Collaborating with non-competing established brands could help you build trust with your target audience and offer wider exposure to your SaaS product. However, make sure the company you partner with has customers that match your buyer persona.
- Host webinars: This is one of the most cost-effective ways to attract potential customers and generate leads. Customers find webinars effective because they can get access to a tutorial or course that helps them solve their problems without paying for it.
- Create podcasts: Podcasts are easy to create and more personal than written content. In addition, when you invite industry leaders to speak in your podcast, more people are likely to hear it because your guest will also share your podcast to their audience, thereby widening your reach.
5) Leverage Content Marketing to Attract and Nurture Customers
Content marketing is a great way to attract and nurture customers.
It reduces your customer acquisition cost by educating and nurturing them throughout your sales funnel and has a good effect on your churn rate. Content marketing also helps build trust with your target audience and gives your sales reps additional resources to close deals.
Follow these SaaS content marketing best practices to reduce your CAC:
- Create content for all stages of your sales funnel:
- For attracting prospects (how-to guides and educational articles)
- For generating leads (free ebooks and white papers)
- For nurturing and converting leads (sales-oriented emails, why choose your product, etc.)
- For converting customers into loyal ones (premium content, research reports, etc.)
- Write a detailed FAQ page that answers all the questions related to your product.
- Publish in-depth case studies and customer success stories that demonstrate the effectiveness of your SaaS product.
- Create a comparison chart between you and your biggest competitors.
- Craft attention-grabbing titles and meta descriptions.
- Insert CTAs at the right place to entice readers into clicking.
For example, Zendesk publishes different types of content to attract and generate leads, from educational articles to research papers to customer success stories:
The articles are free to read, but to access the guide and white papers, you are required to provide details like your name, email, phone number, job level and department:
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6) Automate Marketing Processes
Marketing automation is essential for SaaS businesses looking to reduce their CAC and boost efficiency.
17% of business owners say that the biggest benefit of automation is that it increases revenue:
Businesses that leverage marketing automation experience up to a 451% increase in qualified leads.
Automation allows you to close more deals through a personalized approach by sending the right message to the right prospect at the right time without any human input.
Marketing automation tools like Intercom help you accelerate customer query resolution times even when your team is offline. Intercom can resolve 33% of common questions for you, thereby improving your customer satisfaction rate. This, in turn, increases the free-trial-to-conversion rate.
Marketing automation software like ActiveCampaign helps you send emails based on various actions, automate split tests, and deliver predictive content. This enables you to send messages that your customers want to see.
7) Encourage Free-Trial Users to Stick to Your Product
Getting leads to sign up for a free trial is not enough. You need paying users. Therefore, it is crucial to engage your free-trial users via action-based messages.
For example, if you see that a customer is using a specific feature more than others, send them emails with content that provides them with more insight into that particular feature.
Also, segment free-trial users into three groups based on their activity:
- Active users: Customers who log in but don’t do any activity.
- Engaged users: Customers who are using your product regularly.
- Inactive users: Customers who sign up for a free trial but don’t log in enough.
Create different email campaigns for each group of users to increase the chances of conversion. Here’s how you can encourage them to stick with your product:
- Active users: If a user is logging in multiple times but not doing any activity, it means they want to get started but can’t figure out how. They know your SaaS product does what they need, but they’re not sure how. Send emails or call them to ask if they need any help using your product. Follow up at regular intervals to increase the chances of engagement.
- Engaged users: Since they are using your product regularly, they are likely to convert. But to further enhance the chances of conversion, send them emails with content that helps them get even more out of your product.
- Inactive users: Send them incentives to use your product. Here’s an example of how Netflix lured inactive users to come back to their website: They sent me an email after I left a movie unfinished. The email read: “Pick up where you left off,” along with a CTA button that took me directly to the movie I was watching.
8) Boost Your Customer Retention Efforts
While customer retention doesn’t directly impact your CAC, it can help you recover the acquisition costs. Usually, higher customer retention rates indicate increased revenue.
Here are some great ways to enhance your customer retention rate:
- Create product-specific content to enable customers to make the most of your SaaS software. For example, Slack has a dedicated training section on its website to help customers use the software effectively:
- Create great onboarding programs to help new users get started quickly after they become customers. Doing so allows you to personalize the customer experience, thereby increasing their chances of sticking with your product.
- Analyze why a customer is using your product. Then, provide comprehensive and personalized advice rather than one-size-fits-all tips.
- Stay in touch with customers via emails or in-app messaging regularly. If a client has an annual plan, don’t disappear for twelve months and then start bombarding them with renewal emails at the end of the year. Instead, provide specific, actionable benefits and resources based on individual customers’ needs.
- Offer discounts to customers who didn’t renew after their subscription ended. For example, Avocode sent an email to a churned customer with a 20% discount code, along with highlighted reasons to retry their product:
9) Always Keep Testing
Reducing your customer acquisition cost in the long term won’t be possible if you are not doing some form of testing.
A/B testing helps you gauge which strategies are most effective in attracting and converting customers. Here are some ideas for testing:
- Landing pages: Create different landing pages or add different elements to determine what works best. For example, you can test different lengths of text, colors, fonts and imagery. You should also be A/B testing SEO elements.
- Emails: Create multiple emails with different copy to determine which has more open and click-through rates. Also, check whether new email copy increase the chances of conversion or not.
- CTA buttons: Optimize call-to-action buttons on your website and landing page. Test different colors, text and positioning to analyze what brings in the best results.
- Website content: Change the content on the pages of your website. Write new copy for your homepage to determine whether it improves your conversion rate.
- Pricing model: Test various types of pricing models to learn what entices your target audience to convert.
- Forms: This is yet another element that can impact your conversion rate. Experiment with the number of fields on your forms, the mandatory input, and the layout to determine what resonates best with your customers.
- Website navigation: Your website navigation can have a significant impact on your conversion rate. If it is difficult to browse, prospects will likely bounce away. Experiment with a different navigation order or menu bars to see what makes your customers stay.
Final Thoughts on SaaS CAC
The customer acquisition cost has a huge impact on the success of a SaaS business. Follow the tips mentioned in this guide to reduce your CAC.
Make sure your LTV: CAC ratio is above the industry benchmark (3:1). Track the right SaaS metrics to determine how effective your customer acquisition tactics are. And don’t forget to test different strategies. Good luck with your customer acquisition!