Learn B2B SaaS Marketing

A Comprehensive Guide to Mastering Customer Acquisition Cost (CAC) in SaaS

by 

Lauren O'Bryan

Last updated: September 13th, 2024

Mastering Customer Acquisition Cost (CAC) is a strategic necessity for meeting revenue and profitability targets and ensuring sustainable business growth. This critical metric provides valuable insights into the efficiency of your marketing and sales efforts, impacting everything from budgeting to long-term business strategy.

In this comprehensive guide, we’ll explore the importance of CAC in B2B SaaS and how to calculate it accurately, helping you avoid any pitfalls along the way. We’ll also outline actionable strategies for optimizing CAC so you can refine your customer acquisition strategies and drive your business forward. Without further ado, let’s get started.

What Is Customer Acquisition Cost (CAC)

Customer Acquisition Cost (CAC) is a critical metric that represents the total cost it takes to secure a new customer. It’s a very comprehensive metric that factors in not only marketing expenses but also team salaries.

To fully understand and calculate CAC, you need to differentiate between blended CAC, Paid CAC, and CAC by Channel.

• Blended CAC considers all customers acquired from both paid and organic channels, offering a general view of customer acquisition costs.
• Paid CAC focuses only on customers acquired through paid marketing efforts, which helps to understand the effectiveness of paid campaigns.
• CAC by Channel allows businesses to assess the efficiency of individual marketing channels, identifying which ones yield the best results.

Now, let’s see why CAC is so important in SaaS.

Importance of Understanding CAC in SaaS

CAC is a vital metric for SaaS businesses of all sizes because it provides a quick snapshot of business profitability. A high CAC indicates a longer time to recoup the costs of acquiring each customer. This negatively impacts business growth down the line because a company with high customer acquisition costs has limited funds to invest in growth strategies.

Another really good reason to focus on this metric is that investors often consider CAC as a key benchmark for deciding whether to invest in a business. A lower CAC suggests a better profit margin and a safer investment.

Understanding and optimizing this metric also gives SaaS businesses a competitive advantage, as it helps establish pricing packages that are both attractive to customers and cost-effective.

In general, CAC is a great metric for assessing a business’s overall health.

How to Calculate CAC

Calculating basic CAC is straightforward: add up all sales and marketing expenses for a given period and divide by the number of new customers acquired during that period.

Simple CAC = (Marketing Expenses + Sales Expenses) / New Customers

However, this basic calculation doesn’t account for long sales cycles, returning customers, or freemium pricing models.

Users will often make use of a freemium account for many months before they choose to upgrade to a paid account. In addition, larger companies will take many months to move from a lead to a converted customer. This is where the advanced CAC formula should be used, as it factors in a longer sales cycle and is more forgiving with monthly budget fluctuations.

In a situation where a company has an average lead-to-conversion time of 60 days, the formula will look like this:

CAC = (Marketing Expenses (n-60) + 1/2 Sales (n-30) + ½ Sales (n)) / New Customers (n)

(Where n = current month)

CAC Benchmarks

What constitutes a good CAC depends on the SaaS niche, the business size, and the different channels used for customer acquisition. Costs can range anywhere from $500 per customer for small businesses in less competitive niches to well over $10,000 per customer.

An ideal benchmark is the ratio between CAC and LTV. Aim for a CAC that is three times higher than the LTV of each customer. This 3:1 ratio ensures that you’re not spending more to acquire a customer than they are worth.

Other Metrics That Go Hand-in-Hand With CAC

It’s not uncommon for one metric to be used in conjunction with another, and CAC is frequently assessed along with Payback Period and Customer Lifetime Value (LTV).

• CAC Payback Period: This is the time it takes for the revenue from each customer to cover their acquisition cost. It’s calculated by dividing CAC by the average revenue per customer (ARPC) or the monthly recurring revenue (MRR) per customer.
• Customer Lifetime Value (LTV): This represents the total revenue a customer will generate over their lifetime with the company. It’s commonly used in comparison to the CAC to assess the profitability of customer acquisition efforts.

Understanding these metrics is essential to maximizing the value of a CAC assessment, just make sure not to make the following common mistakes.

Common Mistakes When Calculating and Assessing CAC

1. Not including all expenses: For this calculation to work, all expenses need to be added up – not including some expenses because you think they’re unrelated will skew the results.
2. Omitting customer churn: Adding up all the customers acquired during a given period without factoring in customer churn will also provide inaccurate CAC results.
3. Ignoring CAC payback period: Not considering the payback period when assessing CAC could strain cash flow and quickly send you into the red. This is particularly the case for startups.
4. Overlooking the profitability margin: The margin of profitability is the most important part of the CAC metric. Not considering gross margin can lead to misleading conclusions about profitability.
5. Not segmenting CAC: It’s normal to first assess the Blended CAC, but you should also separate the results by channel and customer segment. This will give greater insight into which channels and strategies are truly effective.
6. Using the basic CAC calculation regardless of sales cycle length: Using the basic monthly CAC calculation will throw skewed results if you suddenly have a budget increase for one month and a long sales cycle. Consider using the more advanced CAC calculation that will take into account budget fluctuations and long sales cycles.

While calculating CAC can be a very simple process, these mistakes are easy to make and will have a big impact on decision-making. CAC is instrumental in business strategy and long-term planning, so accurate figures are paramount.

The Role of CAC in SaaS Business Strategy

CAC is used heavily by SaaS marketers in developing business strategies that allow for sustainable growth. By using the CAC data, marketers can develop forecast models that include the budget necessary for acquiring new customers and achieving revenue targets.

If CAC is disproportionately high, it signals the need to focus on conversion rate optimization or explore more cost-effective marketing channels. A high CAC can also be an indication of poor product-market fit, suggesting the need for product improvements to better meet customer needs.

Pricing strategy is another factor that hinges on CAC. Subscription prices that are too low won’t bring in enough revenue to cover the cost of customer acquisition. Over time, analyzing CAC can help refine pricing models, including implementing tiered pricing to cater to different customer segments.

As you can see, CAC plays a key role in SaaS business strategy. It influences pricing, marketing, sales, product development, and scaling decisions. By managing and optimizing CAC, SaaS businesses can ensure sustainable growth and attract investments, all the while maintaining a competitive edge.

How to Optimize CAC

If your CAC is too high and profitability margins are thin, it’s time to consider the following optimization strategies.

Enhance the Sales Funnel

Begin by analyzing each stage of the sales funnel to see where customers are dropping off. From here, you can pinpoint the best locations to prioritize action and develop content that aligns with the sales funnel.

Consider developing new lead magnets at the top of the funnel to draw in high-quality leads. Middle of the funnel enhancements could include email nurturing to ensure leads are effectively led through the funnel. And finally, optimize bottom of the funnel content by including case studies and comparison pages to help users make a purchasing decision.

Improve Customer Targeting

Your content and paid campaigns may be attracting plenty of visitors, but if you’re not attracting users with a high purchasing intent, it’s wasted spend. To improve customer targeting, start by updating buyer personas, lead scoring, and audience segmentation to ensure all profiles are correct. This lays the foundation for investing time and resources in nurturing the leads who are most likely to convert.

It’s also worth incorporating ABM techniques that prioritize high-value accounts. This will help you get more value from existing customers and, therefore, lower overall CAC.

Use A/B Split Testing

Always conduct A/B split testing for any content you develop, whether for paid ad campaigns or organic content marketing. This will ensure you’re running the best possible version of your content and getting the most bang for your marketing dollars.

Invest in Content Marketing

Content marketing is undeniably the leader in low-cost digital marketing. Not only is it cost-effective but it continues to generate leads for a long time, unlike the short-term nature of paid ads. Content has the ability to attract attention, empathize with the customer, build a relationship, and convert them.

Strategic content marketing, combined with updated targeting, can significantly reduce customer acquisition costs.

Optimize Paid Ads

Analyze and optimize paid ad campaigns to get better results. Make use of additional ad retargeting features, schedule ads for optimal time and exposure, and adjust bids accordingly. It’s also worth prioritizing high-performing channels where you can invest more budget and get a better ROI.

Improve Customer Onboarding

While the focus of improving CAC revolves around generating more high-quality leads, it’s as much about keeping existing customers happy. Investing in retaining existing customers is often more cost-effective, especially when they are identified as being high-value. Happy customers will stay longer and promote your product to others. These word-of-mouth customer referrals are the best advertising a company can get. Overall, improving customer retention rates means a longer LTV and a lower CAC.

Refine Pricing Models

Consider refining your pricing models by including a freemium package or free trial if you don’t already have one. These options allow users to fully immerse themselves in your product and learn the ropes before deciding to purchase, and they’ve proven to be very effective.

Adjusting pricing to include a tiered approach can also be effective because it presents a lower cost barrier to getting started. From there, you can upsell more easily and offer add-on packages. Tiered pricing models are very helpful in moving customers from Freemium to paid packages as they become loyal, long-term customers.

Establish a Customer Referral Program

Implementing a customer referral program is a great way to generate high-quality leads without advertising costs. Your business can gain high-quality leads in a cost-effective way by simply harnessing the connections of your loyal customers. In addition, the perks associated with the referral program also foster a stronger relationship with your customers which serves to improve LTV.

Case Study: Simultaneously Reducing CAC and Increasing Lead Quality and Quantity

At Powered by Search, we have worked with many clients to increase demos, boost ARR, and reduce wasted ad spend. With one client, we were challenged to reduce CAC while also increasing the quality and quantity of trial users.

We decided to focus our CAC optimization strategy on improving the effectiveness of their paid media, in particular, Google Ads. We added new ad variations, tested bid strategies, and optimized lead quality. In addition, we included performance forecasting so that we could really finetune the costs. To get the best outcome, we used a Hypothesis Testing Log to keep track of all the testing and results. And in the end, we were able to achieve a 38% reduction in cost per SQL in 90 days and a 72% improvement in the average conversion rate.

Wrapping Up

It’s fair to say you’re now up to speed with the finer details about CAC and how to calculate it correctly. By understanding and optimizing CAC, SaaS businesses can enhance profitability, attract investor interest, and create sustainable growth strategies.

We provided a selection of actionable strategies that can be implemented to optimize your CAC. Even small adjustments in customer targeting, content marketing strategy, pricing models, or customer onboarding can lead to significant improvements.

CAC is a relatively simple calculation, yet it provides huge insights into a business’s profitability and growth potential. Another way to gain insight into the growth potential of you business is to take our SaaS scalability score self-assessment. This scorecard looks at how effectively you attract, engage, and convert leads, and it will give an indication as to where your business stacks up against the competition.