SaaS Customer Acquisition Cost (CAC)
What is CAC in the SaaS world?
Is your company moving in the right direction or is the future dire and leads to certain doom if things don’t change dramatically? SaaS Customer Acquisition Cost (CAC) is a crucial part of the SaaS foundation because it shows the path on which your company is moving. These are the questions that can be answered by fully understanding your CAC number.
Therefore, only through correctly calculating the CAC metric, you can expect your team to bring rational and effective decisions that are going to be beneficial for your SaaS business.
Before we jump to the calculation and formula of CAC, let us define what exactly is CAC in the SaaS world.
- SaaS CAC = any type of cost (service or marketing) needed to bring a new customer
How to calculate your Customer Acquisition Cost?
Now that we determined what CAC SaaS metric is, let’s see what components CAC consists of. The calculation for Customer Acquisition Cost is pretty straight forward, all you need is two variables- total acquisition cost and the total number of customers. These mentioned variables need to be in the same time frame. A monthly or a quarterly period is often used by successful SaaS businesses. So the entire formula looks like this:
- SaaS Customer Acquisition Cost = Total cost / Total number of customers
By total cost, we mean anything that is contributing to the acquisition should be in this equation. You need to take into consideration all the costs that would otherwise show you the flaws and unnecessary expenses of your acquisition process.
To put this into practice, let’s say you spent 25. 000$ on service and marketing efforts over one month. At the same time, you acquired 200 new customers. In this particular case, your CAC would be 125$.
Why is CAC important?
- CAC indicates how effective your marketing is
- With CAC you can get viable insights into your SaaS subscription models, business effectiveness, and customer success
- Optimization of your SaaS business is way easier
CAC metric indicates how good your current business model is and based on that you can optimize and change marketing strategies if necessary.
If you compare CAC with the SaaS customer lifetime value (LFT) of the customer you can see how well you are doing. The LFT should always be higher than CAC. The general rule of thumb is that your LFT should be around 3 times higher than your CAC. A lower ratio means that you are losing money while a higher ratio may indicate that you are under-investing in marketing. So if we implement the previous example where CAC is 125$ then your ideal LFT should be around 375$.
Those who are successful in the SaaS world use the information provided by CAC to optimize, change, and adapt their business model. They invest a lot of time and energy in making sure that their LTV: CAC ratio is where it is supposed to be (3:1). Track these metrics so that you can determine the most profitable path during the acquisition process.