If you’re a business owner, chances are you’ve heard of the term “CAC.” But what is CAC in SaaS? And how can it be used to benefit your business?
CAC stands for customer acquisition cost. In simple terms, it is the amount of money that your company spends to acquire new customers. There are several different ways to calculate CAC in Saas businesses. At its core, it’s simply dividing your total marketing and sales expenses by the number of new customers acquired during that period.
What is CAC in SaaS Businesses?
What is CAC in SaaS and why is CAC such an important metric? Because ultimately it allows you to track and measure your company’s success in acquiring new customers. By understanding your CAC (and keeping tabs on any changes or trends), you can make more informed decisions about where to allocate resources and how best to grow your business.
Of course, calculating CAC isn’t always easy – especially if you don’t have all the necessary data at hand. However, there are a few simple steps you can take to get started.
How to Calculate CAC in 8 Steps
Follow these 8 steps to correctly calculate your customer acquisition cost.
1. Ad Spend
Your ad spend refers to the total amount of money that you spend on advertising such as paid ads on Google, social media, and traditional forms of marketing.
While Facebook is a great way to reach new people, you have to make sure your ad reaches the correct target audience.
It’s important to measure the return on investment for your marketing efforts. You can do this by calculating your total revenue from advertisements and dividing it by the amount you’ve spent. This will tell you whether or not your advertising efforts are paying off.
2. Content Creation Costs
Your marketing budget includes all the money spent on creating and distributing your content. These can include hiring and paying people to create and promote the content, as well as paying for any materials needed during production.
3. Employee Salaries
While it may initially seem like an unnecessary expense, hiring employees is necessary. And, as you’ll soon see, it pays off in the end.
You don’t have to fire any workers to save money. Actually, customers are just as satisfied with automated bots or other forms of marketing. Whatever you choose, however, you’ll have to add that cost.
4. Technical Costs
The technical costs of a marketing campaign include all the technology needed to help your marketing and sales teams.
This includes the costs associated with using tools such as SEMRush, Ahrefs, and others. It also includes other costs such as purchasing and configuring a CRM.
5. Content Production Costs
These are all the costs incurred when creating content. For instance, if you create a video for marketing, you’ll have to pay for a camcorder, a background, video editing software, and anything else that goes into creating the video.
Even if you hire someone else to create that video content, it still counts.
6. Content Publishing Costs
Your total costs for marketing your eBook will include all the expenses associated with promoting it. This could include Facebook boosts, sponsored tweets, and so on.
7. Maintenance Costs
Recurring costs include monthly and annual fees for your domain and hosting, as well as any other tools you use to run your business. These expenses are ongoing, so you’ll need to factor them into your budget.
8. Count New Customers and Calculate Your CAC
Now add together all the costs from steps 1-7 to get the total marketing and sales spending for a particular period.
Then, figure out how many new customers have come in during that same period.
The Customer Acquisition Cost formula will show you how much one new customer costs you. This calculation helps you determine your gross profit margin and your potential revenue per customer.
Why is CAC Important to a SaaS Business?
The customer acquisition cost of your software-as-a-service (SaaS) business is a reflection of how successful your business will be in the future. Most businesses spend a lot on marketing before seeing any return.
As your CAC continues to go up, it becomes more and more important that you keep track of it.
The chart above shows the first period of the customer acquisition cycle (the red section) where your business is investing time and resources.
As your customer base grows, your monthly subscription revenue will increase. This will eventually offset your costs, and you will start to make a profit.
Once you’ve recouped your initial investment, every month thereafter is pure profit! Until, of course, the customer decides to cancel (which hopefully never happens).
Knowing your CAC is important for multiple reasons.
1. Optimize Your LTV/CAC Ratio to 3 or Higher
You should regularly monitor your sales cycle and your customer acquisition cost. By analyzing your channels, you can make sure that your LTV/CAC is as high as it can be.
For benchmarks, you want your CAC to equal 3, meaning that for every penny you put into acquiring customers, you get three back.
2. Optimize Your Payback Period
Once you acquire a new customer, you lose money. So, you should focus your efforts on getting that money back as quickly as possible.
The amount of time it takes for your business to recoup the money spent on customer acquisition is known as the “payback” or “break-even” point. This is a crucial number to know if you’re running a paid or free product.
3. Track and Optimize Your CAC Ratio
The CAC ratio is a measure of how much a company spends on marketing to acquire one customer. By measuring this, you can identify trends and optimize your marketing efforts to improve profits.
What Is a Good CAC Ratio for SaaS?
The CAC ratio of your company depends on how much value your customers bring to the business.
Customer acquisition cost and customer lifetime value are closely linked.
A good CAC ratio for SaaS is anything below 3:1. This means that for every dollar you spend on acquiring a customer, you can expect to earn three dollars from that customer throughout their lifetime with your company.
The industry benchmark for the ratio of LTV: CAC for SaaS companies is 3:1.
If you want to stay profitable, you should aim for an LTV-to-CAC ratio of 3:1 or higher. However, if your ratio is too high (5:1 or more), you’re likely underspending on the acquisition and holding back growth.
Therefore, if you spent $5,000 on acquiring each customer, you should aim to earn more from them than $15,000.
How To Successfully Use CAC as a Metric in Your Business
Segmenting your customer acquisition costs can be extremely beneficial.
No customer is the same, so it’s important to understand how much it costs to acquire each different type of client.
For example, enterprise customers generally require higher costs to acquire due to longer sales cycles and a greater likelihood of needing back-and-forth negotiation or involving their legal teams in contract terms.
It is still worth pursuing enterprise customers, despite the higher costs associated with an acquisition. You must be mindful of the customer lifetime value (CLV) in proportion to the costs associated with acquiring a customer in that segment. By understanding how your CLV to CAC ratio differs from one segment to the next, you can make more informed strategic decisions.
Understanding your (CLV) to (CAC) ratios by each of your segments will have a significant impact on how you make decisions.
Use your customer lifetime value (CLV) to customer acquisition cost (CAC) ratio to help you understand where you are spending money and how you can best deploy your resources for maximum payback.
By understanding your CLV to CAC ratio, you can identify areas of your business that may be inefficient and adjust your operations accordingly.
These types of resource planning activities will pay dividends.
Calculating CAC can be a complicated process, but the time spent doing so will be well worth it.
Are you ready to modernize your operations?
What is CAC in SaaS businesses? CAC stands for customer acquisition cost. It’s the amount of money that your company spends to acquire new customers. There are several different ways to calculate CAC, but at its core, it’s simply a matter of dividing your total marketing and sales expenses by the number of new customers acquired during that period. So why is CAC such an important metric? Well, because ultimately it allows you to track and measure your company’s success in acquiring new customers. By understanding your CAC (and keeping tabs on any changes or trends), you can make more informed decisions about where to allocate resources and how best