As a SaaS business, you’re always looking for ways to optimize your customer acquisition costs (CAC). But what is a good CAC for Saas businesses? Is it more important to have a high LTV: CAC ratio or a short payback period? Here’s what you need to know!
CAC Meaning
The CAC is the cost of acquiring a customer. This cost is incredibly important in software as a service (SaaS), as it’s the basis for your entire business. Acquiring customers is an expensive process for most startups. Most businesses spend a significant amount of money before seeing any return.
As your company continues to grow, it’s important to examine just how much revenue is needed to recoup your CAC costs. This may take longer than you expect, so plan accordingly.
So, what is a good CAC for Saas businesses? Continue reading to find out!
Importance of Analyzing CAC
Analyzing customer acquisition costs is especially important for SaaS companies because the business model depends on customers staying around for a long time.
Most new SaaS companies will spend a lot on marketing before they see any sort of return on their investment.
It’s crucial to examine just how much revenue is needed from your customers before your company can begin to turn a profit. It could take longer than you expect for CAC to be recovered, and it may take a while before you’re actually able to start making a profit from customers.
From a business standpoint, CAC is extremely important to consider.
When analyzing your customer base, you may find some customers who are willing to pay more, but the cost of acquiring them is too high. This pushes you towards other, less profitable, markets.
Freemium models can backfire too, where free users are putting too much of a strain on your business.
CACs allow you to calculate your profit margins, revenues, and profits as you scale.
Your business’s success relies on your ability to keep track of these SaaS metrics and data in order to circumvent the inefficiencies that can kill a business.
How do you calculate CAC?
Here is an easy formula for CAC:
Example:
If your sales and marketing costs for the month were $5,000 and you gained 25 customers, your CAC would be $1,000.
CAC= $5,000/ 25 = $200.
We calculate, for each time period (monthly or quarterly), how much we spent on Sales and Marketing in order to acquire a certain number of customers.
Whilst this formula is not entirely wrong, it is oversimplistic and can be misleading.
What is a Good CAC for SaaS?
There’s no set answer for how many sales it takes to break even. It will depend on your CAC and LTV.
We said you could potentially be paying $6,000 in CAC for a $6,000 LTV SaaS company to be profitable. This doesn’t take into account other operating expenses.
It’s useful to calculate your customer LTV, which is how much money you earn from each customer. You can compare this against your CAC, which is how much it costs you to acquire a new customer.
We calculate our average CLV by subtracting their acquisition cost (CAC) from their CLV. We then divide our total sales and marketing costs by this number.
However, profitability does not only include gross profit. Other business-related expenditures such as tech, customer service, and general & administration must also be taken into account. That is why your LTV: CAC should be higher than 1.
A 3:1 ratio between LTV to CAC is optimal.
The LTV: CAC ratio varies based on which stage of business you’re in. When you’re a startup, your 1:1 or 2:1 ratio is normal as you invest in testing to find your product-market fit and acquire customers. As your startup matures, your 1:1 or 2:1 ratio will change over time.
As your revenue grows, your CAC: LTV ratio should decrease. This is because your ARR will increase, and your Churn rate will decrease.
CAC and LTV
CAC is an important metric to consider when evaluating a company, but it is only one part of the puzzle. LTV must also be taken into account in order to get a complete picture.
Different companies will have different CACs, and it’s important to take into account the price of the product when considering this metric. In general, more expensive products will have a higher CAC.
CAC is the amount of money a company spends on acquiring a new client.
Customer value analysis is a method that SaaS companies use to determine how much money they can spend on a customer.
Determining the worth or value of a client to a company is important.
The biggest challenge with sales is balancing the number of outbound calls and inbound opportunities. The ratio of the two is more important than the specific numbers.
In business, your goal is to maximize the value of your customers while reducing the expense of acquiring them. The best SaaS businesses have a 3:1 ratio or even 7:1 or 8:1.
Now that you’ve computed your CAC, it’s time to start looking for strategies that’ll encourage customers to buy from you.
With a variety of marketing tools to choose from, it’s easier than ever to find the one that suits your business.
It’s essential that customers can find your business online. Beyond these basic marketing principles, it’s also crucial that you utilize search engine optimization (SEO) strategies.
Your potential customers need to find you!
How Does CAC Relate to the Payback Period?
If you spend $300 to acquire a customer who pays you $300year, this gives you a 12-month return on investment (ROI). It also means that for every $1 you spend, you get $1 in 12 months.
The tricky thing about CAC is to measure it, and then constantly be looking for new ways where (the cost of acquiring a customer) is cheaper and has a higher return on investment.
Spending $25 to acquire a customer who spends $300 a year with you is much better than paying $300 for each customer.
If you have confidence in the customer’s Lifetime Value (LTV), then spending more today to acquire them may be worth it. However, it is important to be careful not to overspend.
Should you focus on optimizing for a higher LTV: CAC or a shorter payback period?
Here’s a quick question for you.
You have two options: Company A and company B.
If company A spends $100 on marketing, that new client will spend $600 over their lifetime. It will take 18 months before that $100 investment is recouped.
Compared to company B, which has a 1.1 ratio, and pays back on day 1, the company’s 1.1 ratio is average.
Which company has a better reputation?
As a CEO, it is important to think about how you can optimize your company to get cash back quickly so that you can reinvest it. This will help you to grow your business and be more successful in the long run.
Time is more important than money and if you believed that, you’d be optimizing for LTV: CAC of 6, Company A.
How To Effectively Track CAC in Your Company
Just like Revenues and Customers, it’s always a good idea to segment CACs in your business.
No two types of customers are the same, so it’s essential to understand how expensive it is to bring on each customer type.
For example, there are generally higher costs associated with bringing on Enterprise customers, as sales cycles tend to be long and these customers are unlikely to agree to pre-written contract terms without some back and forth or getting their legal teams involved.
That isn’t to say that it’s not worth it to pursue Enterprise customers. Still, you have to be mindful of the CLV in proportion to the costs associated with acquiring a customer in that segment.
Understanding how your CLV to CAC ratio differs from one segment to the next will significantly impact strategic decision-making.
Use your CLV to CAC ratio to dig around for operational insight. Ask yourself where you are spending money and how you can best deploy your resources for maximum payback.
These types of resource allocation exercises will pay off in spades.
Remember: CAC can be a large-scale accounting project and will require time and energy to perfect. However, every minute you spend figuring out how to calculate it in your business and gleaning operational insight from it–will be worth it.
Conclusion
There’s no easy answer when it comes to what is a good CAC for Saas businesses. It depends on the business model, goals, and other factors. However, if you’re looking to optimize your customer acquisition costs, it’s important to consider both a high LTV: CAC ratio and a short payback period.
