CAC is an estimate of the cost to get a new customer and reflects the effectiveness of your sales and marketing activities and the efficiency with which you acquire new clients. This metric is used across many industries, but it’s particularly important in SaaS because balancing the cost to get a customer with the value that customer will bring in their lifetime is what the whole business model revolves around.
In SaaS businesses, customers sit somewhere on the spectrum of willing to pay a lot, but expensive to acquire, and cheap to acquire, but willing to pay very little. It’s all about getting granular enough to optimise your sales and marketing for profit. This means looking at your CAC not only at the business level but also at the cohort level.
Want to calculate your CAC? Read on to dig deeper into what CAC is and why it's an essential metric in your SaaS financial model.
What is CAC?
Customer Acquisition Cost (CAC) is the average estimated amount of money that a firm must spend to acquire a paying customer. Also, it is most relevant when compared to the Customer Lifetime Value (LTV).
How to calculate CAC?
There are many different definitions of CAC, the most common being Fully Loaded, Blended (also known as Unloaded), and Paid. They each have their own method to calculate but largely reflect the inputs that are used to define what "marketing" is.
1. Fully Loaded Method
Fully Loaded CAC considers the total cost of the entire sales and marketing function, against the total number of new customers that were acquired. Specifically, it considers the cost of the salaries and benefits, overheads related to sales and marketing team members (e.g. office space cost, legal, recruitment, snacks), software costs, as well as paid advertising and one off costs of content. It should also include all referral fees, discounts, credits incurred by the company.
This type of CAC is most commonly used by Investors and Founders to assess the overall efficiency of a company’s marketing.
2. Blended Method (Unloaded Method)
Blended CAC considers all the costs in the Fully Loaded method, except for salaries, overheads and software related to sales and marketing team members, against the total number of new customers that were acquired. Specifically, it refers to paid advertising and one off costs of content. It should also include all referral fees, discounts, credits incurred by the company.
3. Paid Method
Paid CAC considers all the costs in the Blended Method, except one off costs of content, against the total number of new customers that were acquired directly through paid channels.
This way of measuring CAC is used to determine the effectiveness of paid channels.
When to use different CAC methods
When a firm is in the scaling stage or yet to achieve product-market fit, Blended CAC can be beneficial as it removes the fixed expenses (such as salaries) allowing the business to focus on channel performance. However, failing to include wages in CAC can distort incentives when a firm grows. This may lead to over investment in labour-intensive channels (such as content development) that do not use paid Advertising Expenses to attract new consumers. Therefore, for companies with a mature customer acquisition funnel, the Fully Loaded method for CAC is more accurate.
Why CAC is important?
Understanding our CAC helps SaaS businesses understand the effectiveness of their acquisition strategy. It also helps potential investors gauge scalability when used in comparison to LTV (known as the CAC: LTV ratio) or when used to calculate the CAC payback period.
Businesses put a lot of money and effort into acquiring customers, and CAC can help you ensure that you are gaining the best results from your efforts. SaaS businesses will need to conduct cohort analysis to understand how to improve their CAC. The goal is to find the customer profile and marketing channel that is the most efficient and effective—and then prioritise the segment that has the lowest CAC.
How to improve your CAC?
CAC can be impacted negatively by any friction in the buying process. Each valuable prospect that drops off on the path to paying customer will increase CAC. For businesses looking to improve their CAC, here are some things to look for:
- Increase website conversions: A website is your online sales representative and has a big impact on CAC in your SaaS financial model. You want to ensure that you aren’t losing valuable customers because of a weak website. Make sure your CTA’s are compelling, your load times are fast, your website is mobile responsive, your landing pages are optimised, and the messaging on your website communicates the value offered to visitors.
- Look at the whole funnel: Every time prospects are asked to click, 15% or more of those potential customers drop-off. Businesses must look at the entire process from coming to the website to becoming a trial customer then a paying customer. It’s essential to make this process as seamless as possible and remind the customer of the value they will receive by moving to the next step. Look to CAC SaaS benchmarks for guidance on target metrics for goal setting in your funnel.
- Adjust your strategy: Block time to periodically review your metrics using a SaaS financial model and even seeing how they stack up to other SaaS companies using tools like the gini SaaS metrics valuation benchmarking template. Be prepared to adjust your strategy based on cost and effectiveness.