Customer Acquisition Cost (CAC) can be calculated by dividing all the Marketing and Sales costs required to acquire a new customer within a specific time. CAC is an important metric for growing businesses to determine profitability and efficiency.
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 also known as the cost of convincing a potential customer to buy your product or service. In this article, I will explain why the CAC metric is important, how you can measure and improve it.
How To Calculate Customer Acquisition Cost
Basically, the CAC can be calculated by this simple formula where all the costs spent on acquiring more customers is divided by the number of customers acquired in the period the money was spent.
The formula for calculating CAC is:
|CAC: (Cost of Sales + Cost of Marketing) / New Customers Acquired|
B2B SaaS companies determine the CAC by two major components. First is the marketing expense which is basically the cost required to generate a lead or a potential customer. And second is the sales expense, which is the cost required to convert that lead to a customer.
Let us look at an example here.
Say in the month of August, your marketing costs were around $6000 and $2000 was spent on sales. Now you could close 8 new clients in August.
The CAC for the month of August will be: ($6000 + $2000)/8 = $1000
How Life Time Value (LTV) affects CAC
CAC isn’t the only acronym you need to consider. To get the most value out of knowing CAC, you also need to calculate LTV. Customer lifetime value (CLV or LTV) is the amount your company makes from each customer during your customer’s entire “lifetime” of using your service or product.
Also, the time duration for which the person remains your customer and how much revenue you generate from them is different for different businesses. Here are the factors that impact your company specifically.
Rate of customer retention: The percentage of customers who renew their plans with you.
Profit per customer: This includes CAC and other expenses like the cost of goods and the amount spent on marketing and sales. This also includes the cost to run the company. Profit per customer is a percentage value.
This is how it is calculated,
|((Net income per customer -CAC)/ Revenue from Customer over their lifetime) * 100|
The average amount each person spends:
|Sum of what each customer spends over their lifetime / the number of customers.|
How to Calculate CAC to LTV Ratio
Calculate the CAC (including sales and marketing expenses), then determine lifetime value (LTV) while taking into consideration gross margin. The final ratio will be, LTV divided by CAC.
|CAC= (Cost of Sales + Cost of Marketing) / New Customers Acquired|
LTV= (Average monthly payment* gross margin%) / Churn Rate
Suggested Reading: How to calculate the adoption rate and its impact on customer LTV?
What is a good CAC?
A good customer acquisition cost (CAC) can be determined according to the industry you belong to and the strategies implemented by a business to get new customers. In SaaS businesses, CAC is usually compared to a customer’s lifetime value (LTV).
This serves as an indicator of how well your business is doing. The ideal CAC: LTV ratio is widely accepted to be 3:1.
CAC and Customer Success
CAC is an important metric when determining customer success. But this is something to think about, how come CAC being a customer success metric, does not include the customer success expenses in its calculation. Yes, almost every customer acquisition cost calculation steers away from including the sales and cost linked with customer success.
Even though customer success has the leverage to bring in significant revenue and boost up the scale, due to upsells and cross-sells, it is excluded.
It is because CAC measures your capability to produce new revenue from marketing and sales expenditure. When you input customer success into that, it can lead to inaccurate results, hence, that explains the exclusion.
Additional Resources: 7 customer success metrics to track
CAC at different industries
This graph gives us a clear idea of how CAC differs from industry to industry. Not all businesses can expect to achieve an identical CAC. Also, the more expensive the product, the higher will be the CAC. Starting from around 7$ in the travel industry to going up to 395$ in the software technology industry.
5 Strategies for Reducing CAC
You can lower your CAC by converting leads and potential customers to paying customers, increasing the value of what customers get, and using a customer success platform like CustomerSuccessBox to have a 360 view of your customers.
Add value to your offering
In the SaaS industry, your product goes through various updations. But these updates don’t always have the desired effect. This is the best time where you can interact with your customers.
This can be done via surveys or emails and will help you figure out what would best fit their needs. You can then find trends in these feedbacks and reviews. This will indicate the places where you need to up your game and make necessary changes.
Improve on-site conversion metrics
You can set goals on Google Analytics and perform A/B split testing with new checkout systems in order to improve the landing page, site speed, mobile optimization, and other factors to enhance overall site health.
Optimize your pricing strategy
A Big part of CAC feeds into the recovery period, as well as your CAC:LTV ratio. You must aim at optimizing pricing. This will help you gain cash up front to recover your CAC. Thus can be in the form of integration costs, mandatory training, etc.
Reduce Dependence on Paid Advertising
It is extremely difficult to reduce your CAC if your SaaS company is dependent on acquiring customers with the help of paid ads. The ROI of paid advertising is linear. Hence, it is essential to implement other marketing strategies, such as SEO, social media marketing, and email marketing.
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. You can:
- Leverage Referrals
- Host Webinars
- Create Podcast
- Start GuestBlogging
Use a Customer success platform
A CS platform will help you with everything, right from onboarding to referrals. It will also help you keep track of new customers, their movements through the sales funnel, their activity at each touchpoint, and much more. CS tools make the processes automated and this, in turn, reduces CAC.