At Insivia, we believe that budgeting marketing and advertising without knowing user acquisition cost is like sailing without a compass. The ugly truth is that in early stage SaaS businesses, far too many have no idea what their user acquisition cost (UAC) is, and are not actively seeking to determine this critical metric. Throughout this post, we’ll share what user acquisition cost is and why it matters for your business. We’ll also dig into how to get the return on investment from your marketing that’s right for your business to increase leads and improve your user base.
CAC is calculated by taking the overall cost of acquiring customers including both sales expenses and marketing expenses and dividing that cost by the total number of customers that were acquired. The cost and total customers must both be from the same period of time.
CAC formula visualized by HubSpot
Let’s try out the CAC formula in a real world example. Let’s say you are on the growth team at a SaaS firm and you’re looking back on 2021. You get the data from your team to determine how many customers were acquired in 2021 and how much was spent on marketing and sales to acquire new customers.
If you spent $1 million on sales and marketing in 2021 and acquired 4,000 new customers, your CAC would be $250. Overall, your customer acquisition cost is $250 for 2021.
All sales and marketing costs factor into CAC. To make sure that this number is fully inclusive of all sales and marketing activity, here are a few factors to consider.
Costs that go into SaaS product promotion to your target customers. These could be paid digital marketing ads, sponsorships, print advertising, whatever your company uses!
Salaries factor into CAC. The salaries of people on the sales/marketing teams are included in CAC, along with sales commissions. Be sure to remember the costs of any freelancers or contractors too!
Any other expenses that keep the marketing/sales ship up and running. This could be tools your team uses, equipment they need to get their job done, travel expenses, trade show costs, rent, and so on.
If you’re still in the process of fine-tuning your product and finding your ideal target customers, the cost of customer acquisition will see a lot of variation.
However, many SaaS companies grow faster than they realize they’re spending. The growth curse can be growing without an awareness of how much the company has spent to achieve this growth, and a rude awakening is realizing that you’re not actually profitable due to these costs.
As your product shifts and changes during the refinement process, the analysis of your CAC through these changes helps keep a pulse on how much money is going into customer acquisition. CAC will help your business be prepared for growth.
Going back to our concept of payback period, the time your business needs to get back the CAC through your revenue will vary heavily by business models. The ideal scenario is that it takes no longer than 12 months to regain the cost of acquiring new customers.
For a new SaaS business, this might not seem like a feasible timeline at this point. That’s okay - while you build up to that, use that time limit as a goal to aim for as your business grows in maturity. Cash flow is important to a healthy business, so recovering these costs at a steady pace helps keep business booming.
User acquisition cost (UAC) can also be known as customer acquisition cost (CAC). CAC is the average cost it took to close a new customer after you’ve calculated the expenses of marketing and sales tactics that it took to draw them in. These expenses should include the people, tools, property, anything at all that was used during the process of marketing and selling to the customer that helped convert them.
CAC can be calculated by dividing the money spent on attracting and converting the customer during a period of time with the total number of customers that were converted during that same time period. CAC shows us what financial effort went into enticing someone to actually make a purchase.
The lower your CAC is, the better your sales process is. On top of that, a lower CAC means a higher ROI.
The business model of SaaS companies make CAC inherently critical by nature. SaaS’s business model has a large dependency on the lifetime value of a customer, making the cost of finding new customers related to their value overall.
FirstPageSage calculated the average CAC by the industry of their clients. B2B SaaS comes in with an average CAC between about $100-400.
New SaaS companies often spend a significant amount of effort, money, resources, and time to attract new customers. This investment often occurs before seeing any type of profit from this investment. An overall analysis to determine where the inflection point is when the investment put into attracting the customer meets the profit made from the customer is key to understanding a SaaS company’s returns.Let’s use an everyday example.
Say you buy yourself a $1000 fancy coffee machine to kick your habit of buying $5 lattes every day. For this investment to be worthwhile, you need to be receiving value from the coffee machine. At the point that you’ve made yourself 200 coffees instead of buying them, you’ll have broken even.
This “200 coffee” number is the point where you’ve recovered your CAC and start to profit from your choice to buy the coffee machine.Your business needs to identify what this point will be for your customers - to recover the CAC and start to make a profit.
Visualization of CAC inflection point from priceintelligently.com
The timeline at which you reach this point of profit can also be thought of as a “payback period”. The payback period is a key piece to calculating and understanding CAC.
Your payback period is how fast or slow you get profits from customers. This payback period determines the speed at which you can take the cash from paying customers and put it back into your business to help you grow.
For a business to be profitable and grow, there must be a solid and consistent cash flow. Money that comes in today can help you grow faster rather than money coming into the business at a later time.
Payback period as visualized by priceintelligently.com
CAC also helps set informed pricing models. CAC can vary across different customer types and personas. You can identify high value customers as well as customers who use your lower cost or “freemium” models. The CAC will vary by segment, and will be a key part of your pricing analysis.
Are the high value customers incredibly expensive to gain and keep? Are the cheaper customers hindering you from making better revenue? Determining your CAC can help identify the full picture of your business’s pricing model. You can identify your margins and your profits as you grow. Your business needs to know these numbers to not only stay in business, but to grow as well.
If throughout this process you’ve realized that your CAC is higher than you’d like, don’t worry. There are a few different methods to optimize your CAC and set yourself up for growth.
Make sure you have properly defined customer personas and quantify these customers. Dig into things like sales cycle length, willingness to pay, conversion rates, what each persona is motivated by, etc. This is a full qualitative and quantitative analysis exercise.
Identify which channels have proven returns and take a hard look at your spending on acquisition tactics. Make sure you’re not throwing away cash where it’s not converting into revenue.
What does each step of your sales and marketing process look like? How do people move through your funnel? What are your drop off rates? Determine the conversion rate of each stage of the funnel, and quantify each stage of your process.
Pricing strategy goes hand in hand with what you’ve learned about your CAC and LTV. By optimizing your pricing strategy, you can determine methods to earn cash from target audience up front as a way to improve CAC through things like start-up costs; this will lead to profits coming in as soon as possible.
Value propositions and market differentiation stand at the core of your competitive advantage. Your value proposition defines the reasons why people want to buy from your company.
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