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Importance of Customer Acquisition Cost for SaaS Companies

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Importance of Customer Acquisition Cost for SaaS Companies

There are many important marketing metrics that need to be regularly calculated and reviewed. The importance of customer acquisition cost for SaaS companies cannot be over emphasised.  The relationship between CAC and LTV (Customer Lifetime Value) is as important and must also be calculated and monitored as a priority.

CAC is a measurement of how much it costs a company to acquire a customer.    To calculate it you divide your Sales and Marketing Cost by the number of new customer's in a given period.  

CAC Formula - Importance of Customer Acquisition Cost for SaaS Companies

Your Sales and Marketing Cost generally includes:

  • Program and advertising spend + 
  • salaries + 
  • commissions and bonuses + 
  • overhead 

for the given period you are calculating for.

The relationship between CAC and LTV is important because if the LTV is lower than the CAC then the business won’t be a viable one.  So SaaS companies need to put sufficient effort into keeping their CAC as low as possible and their LTV as high as possible. 

In order to keep CAC at a minimum you need to keep the amount of effort required by your Sales and marketing teams as low as possible.   So some of the ways you can keep CAC low are:-

 

Segment by Channel

Breaking CAC down by channel can be very useful.  Average out your Sales and Marketing costs if you cannot break these down by channel.   Calculate the CAC for each channel individually and then focus on the channels with the lowest CAC to achieve results at lower costs.    

 

Marketing Automation

Implementing marketing automation to reduce the human effort required for your marketing and sales process.  Marketing automation improves lead generation, conversion optimisation, process flows, analytics and reporting to name just a few.  Using marketing automation will help reduce manual effort and keep your CAC low along with providing lots of other benefits.

 

Work on Increasing Conversions

Your Sales figures are directly related to how many of your visitors are converting.  Focus on all relevant aspects of your marketing campaigns - CTA’s, content copy, email copy etc.  Do A/B testing until you get it right and conversion rates should gradually increase.

If you are using paid ad campaigns use retargeting to improve conversion rates.

 

Website Design

Align your website to your overall marketing strategy.  Make sure your content is what your potential buyers need.  Make sure it is well laid out with clear calls to action and is designed specifically for optimum conversion rates.  The conversion process needs to be as easy as possible.  Pages such as pricing pages are critical and need to be well designed and optimised for conversions.  Use insights and split testing until you get it right.  Check out our recent blog 5 Ways SaaS Companies Can Dramatically Improve Their Digital Marketing for tips on optimising this page.

  

Inbound Marketing

Inbound marketing is a cost-effective way of keeping marketing costs down.  Consider implementing some inbound marketing campaigns if you don’t currently run them and measure the results.  Make sure you review these results regularly, tweak and go again.  If you are not familiar with inbound marketing take a look at our inbound overview.

 

Customer Service

Having outstanding customer service is important to every business.  People expect outstanding customer service levels and they will recommend your product if they have a great experience with your brand and product.  They will become brand advocates and may recommend your product to their friends and colleagues.  This will all help lower your CAC and increase your LTV too which you mustn't forget about.

 

Reduce Churn Rate

You need to keep churn rate low for many reasons.  The fact that it costs 6 or 7 times more to acquire a new customer is a great reason in itself.  Another reason is that customers who stop subscribing as a result of a bad experience may pass the word around or post bad reviews which will hurt your reputation and impact sales.  So remember to keep existing customers happy while you try to bring in new ones.  This will have a positive impact on your CAC. 

 

Know Your Audience

It goes without saying you need to know who you are trying to sell your product or service to.  Take time to develop detailed buyer personas to make sure you target the right audience at the right time and in the right place.  This will result in more qualified leads and higher conversion rates which will help reduce CAC.  

 

In summary, low Customer Acquisition Costs are key to the profitability of your SaaS business.  In order to make sustainable profit you need to keep it as low as possible so put a strategy in place and implement some of the above tips.  Regularly review the impact on your CAC and keep working to improve while at the same time monitoring your LTV.  

If you would like to learn about other important metrics you can download our marketing metrics guide to see what other metrics are important, how to calculate them and why you need to be monitoring them.

If you would like to discuss your marketing metrics or need any other marketing advice, feel free to contact me directly at sinead@webjourney.ie.  

Marketing Metrics for CMO's and Marketing Managers

 

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Topics: Inbound Marketing, Customer Acquisition Cost, Marketing Metrics

Sinead O Driscoll

Written by Sinead O Driscoll on Jan 26, 2017

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