CAC is the total cost of all the marketing and sales activities that a business needs to undertake to attract a new customer.
CAC is the total cost of all the marketing and sales activities that a business needs to undertake to attract a new customer. It includes all the costs associated with acquiring new leads, such as marketing campaigns, ads, events, referral fees, salaries and commissions, and other overheads.
It is important to note that CAC is not just the cost of acquiring a new customer, but also the cost of acquiring a customer who will stay with the business and generate revenue over time. Therefore, it is essential to focus on the quality of leads and customers rather than just the quantity.
SaaS businesses typically have a significant upfront cost of acquiring customers. Usually, SaaS businesses need to cover this cost through subscription fees or other charges. Since the cost of acquiring new customers impacts their revenue and profitability, it is essential to understand, track and manage CAC. Consequently, a low CAC often translates to the ability to scale up the business and increase revenue in the long run.
Moreover, CAC is an essential metric for investors and stakeholders who want to evaluate the financial health of a SaaS business. A high CAC can indicate that a business is spending too much on acquiring customers, which can be unsustainable in the long run.
Another crucial aspect of CAC is its impact on customer lifetime value (CLV). CLV is the total amount of revenue a customer generates for a business over their lifetime. A high CAC can reduce CLV since it takes longer for the business to recoup the cost of acquiring the customer. Therefore, it is crucial to balance CAC and CLV to ensure that the business is profitable and sustainable in the long run.
CAC is a critical metric for SaaS businesses since it impacts their ability to generate revenue and grow over time. By understanding, tracking, and managing CAC, businesses can optimize their marketing and sales activities to acquire new customers in a cost-effective manner. A low CAC can also indicate the ability to scale up the business and increase revenue in the long run. Therefore, it is essential to focus on the quality of leads and customers rather than just the quantity, balance CAC and CLV, and ensure that the business is profitable and sustainable in the long run.
Let's break down the various components of CAC:
Marketing expenses include everything that a business spends to attract new leads, including pay-per-click (PPC) ads, content marketing, and other promotional activities. These costs are typically time-sensitive since they are linked to the timing of marketing campaigns and other promotions.
Sales expenses include all costs associated with selling a product or service. This can include salaries and commissions of salespeople, sales tools, lead generation, and nurturing costs. Typically sales expenses are based on the volume of sales, meaning that they have a direct impact on revenue and growth.
Overhead Costs are indirect costs not directly linked to selling or advertising but still affect customer acquisition costs. These costs include software subscriptions, salaries of non-sales staff, rent, utilities, etc. While these costs are not immediately visible in the sales acquisition cost, they are still factored in, making it essential to understand them.
Calculating your CAC is relatively straightforward. You can do it in three simple steps:
Identify and aggregate all the costs related to sales and marketing activities. This can include salaries, marketing campaign expenses incurred over a particular period, referral fees, promotions, and other overhead costs.
Determine the number of new customers acquired during that specific period. Ensure that you also account for the marketing and sales channels through which each customer was acquired. By doing so, you can identify the most effective channels and allocate your resources accordingly.
Divide the total sales and marketing expenses by the number of new customers acquired during the particular period. The result is the CAC for the specific period.
According to a 2020 survey by the software review site, FinancesOnline, the average CAC for SaaS businesses is $1,214. This number varies depending on the industry, the type of business model, or the target market.
The CAC benchmarks for businesses depend significantly on their specific industry and target market. For instance, businesses that target small and medium enterprises (SMEs) might have a lower CAC than those that target larger companies. Similarly, Customer Relationship Management (CRM) SaaS businesses have a lower CAC, with an average of $88, while Software as a Service, (SaaS) advertising businesses have a higher CAC, with an average of $395.
Reducing CAC can help bring down the cost of acquiring customers, translate to lower costs, and ultimately propel growth. Here are some tips on how to reduce CAC:
Instead of trying to target as many people as possible, focus your marketing efforts on leads that match your ideal customer profile. By creating targeted campaigns, you increase the chances of acquiring customers who will stay longer and pay more.
Ensure that your sales teams are well trained, and their efforts are well coordinated. Optimizing sales and fostering collaboration among team members is essential in efficiently driving down CAC.
Improving the onboarding and support of your customers will result in higher retention rates, bringing down the CAC. Happy customers are more likely to refer other customers, cutting down referral fees and other costs associated with acquiring new business.
CAC is an important metric that helps SaaS businesses understand their customer acquisition costs and work towards reducing them. By breaking down the various components of CAC, calculating it, examining industry standards and benchmarks, and understanding how to reduce CAC, businesses can optimize their resources to better reach new customers and grow in the long run.