Of all the KPIs you can track for your company, one of the most important is the SaaS CAC metric. It tells you just how much you are spending to acquire a customer - in other words, how much you have to earn from each customer to be profitable on the initial acquisition or in the long run.
What is CAC in SaaS, though? And what is a good CAC for SaaS companies? Is there any way to improve your CAC SaaS metric? You’ve got questions, we’ve got answers. Today, we’re going on a deep dive into customer acquisition cost to help you gain a full understanding of his metric. You’ll learn how to calculate CAC SaaS metrics as well.
By the time we finish this conversation, you’ll be capable of calculating the CAC for your company and you’ll know what your next steps should be. Let’s start with a quick definition for those who are new to CAC SaaS metrics.
- Why is SaaS CAC Such a Key Metric for Business Owners & Investors?
- How to Calculate CAC SaaS Metrics: Step-by-Step Instructions
- What is a Good CAC for SaaS Companies?
- What is a Good LTV CAC Ratio for SaaS?
- Tips for Improving SaaS CAC Metrics
- Wrapping Up Our Guide on CAC SaaS Metrics
What is CAC in SaaS, Exactly? Customer Acquisition Cost Defined
What is CAC in SaaS, exactly? It stands for "Customer Acquisition Cost”. This metric is used not just by the SaaS industry - but by any business - to calculate how much money it costs to acquire a new customer. It helps you gain a better understanding of the economics of your business so you can make data-driven decisions about sales and marketing.
With that said, this metric is particularly critical for SaaS companies who are looking to figure out the long-term viability of their business. Think about it like this - with SaaS, you typically charge a subscription to your business offerings. So by knowing how much it costs to acquire a customer, you can then work backward and figure out how many months you need to keep them onboard as a paying customer to achieve profitability.
In general, CAC is calculated by dividing the total sales and marketing costs by the number of new customers acquired during a given period. For example, if a SaaS company spent $100,000 on sales and marketing efforts in a month and acquired 100 new customers during that same period, the CAC would be $1,000 per customer.
It's important to note that there are different ways to calculate CAC, and the specific method used may vary depending on the company's business model and goals. For example, some companies may factor in the costs of onboarding and training new customers, while others may exclude those costs. We’ll provide you our advice on how to calculate CAC SaaS later on.
Whether you’re trying to calculate the LTV of your SaaS company or you’re just curious about what you’re paying to acquire a customer, this is undoubtedly a key metric. Below, we’ll progress the conversation a bit and point out a few reasons this is an indicator you need to know for your operation.
Why is SaaS CAC Such a Key Metric for Business Owners & Investors?
Some experts argue that CAC is perhaps the most important metric for a SaaS business to be aware of. This is because not only does it offer you key insights on its own, but it’s also used in calculating other key metrics - like LTV.
Investors care about this metric too, and if you’re looking to raise funding or sell your company one day, you’ll need to make sure your CAC is desirable from their point of view.
Here are a few reasons you want to pay close attention as we teach you how to calculate CAC SaaS metrics - and how to improve them:
- It helps optimize sales and marketing spending: By calculating CAC, SaaS companies can determine the ROI of their sales and marketing efforts. They can then adjust their spending and tactics to ensure that they are acquiring customers in the most cost-effective way possible. This not only helps them improve profitability but also helps them scale their business more effectively.
- It provides insights into customer behavior: By analyzing CAC over time, SaaS companies can gain insights into customer behavior. For example, if the CAC is increasing, it could indicate that it's becoming more difficult to acquire new customers or that the company is targeting the wrong audience. By understanding these trends, companies can adjust their strategies accordingly and stay ahead of the competition.
- It helps evaluate investment opportunities: For investors, CAC is a critical metric for assessing the potential of a SaaS company. By looking at CAC in comparison to other companies in the same industry, investors can evaluate the efficiency of the company's sales and marketing efforts. This information is crucial when deciding whether to invest in a particular company.
- It's linked to customer lifetime value: CAC is closely related to customer lifetime value (CLV), another important metric for SaaS companies. By tracking both CAC and CLV, companies can gain insights into their profitability and adjust their strategies accordingly. For example, if the CAC is high but the CLV is also high, it may make sense to continue investing in sales and marketing efforts to acquire new customers.
All of this is to say that SaaS CAC is a key metric for business owners and investors because it helps them assess the cost-effectiveness of their customer acquisition efforts, optimize their spending, and make data-driven decisions for growth and profitability. And at this point, it’s time we teach you how to actually calculate it - keep reading below…
How to Calculate CAC SaaS Metrics: Step-by-Step Instructions
The implications of your CAC SaaS metrics are vast - and can influence the trajectory of your business. The good news is that actually figuring out how to calculate CAC SaaS metrics is simple and fast. It takes just a few seconds and requires just a couple of other metrics - including:
- Total Sales and Marketing Costs: This includes all the costs associated with your sales and marketing efforts, such as advertising, events, content creation, and salaries of sales and marketing personnel.
- Total New Customers: This is the total number of new customers you acquired during a specific period, typically a month or a year.
Once you have these two metrics, you can calculate CAC using the following formula:
CAC = Total Sales and Marketing Costs / Total New Customers
For example, if your total sales and marketing costs were $100,000 for a month, and you acquired 100 new customers during that same month, your CAC would be:
CAC = $100,000 / 100 = $1,000 per customer
It's important to note that there are other metrics you may want to factor into your CAC calculation, depending on your business model and goals. For example, you may want to include the cost of onboarding and training new customers or factor in the average revenue per user (ARPU) to get a more accurate picture of your CAC.
Ultimately, the specific metrics you need to calculate CAC will depend on your business and the goals you're trying to achieve. But by tracking the essential metrics mentioned above, you can get a good understanding of your customer acquisition costs and make data-driven decisions to improve your sales and marketing strategies. And with that said, you’re probably wondering how your current CAC stacks up to the industry average. What is a good CAC for SaaS companies? Let’s take a look…
What is a Good CAC for SaaS Companies?
This is a tricky question - because there isn’t necessarily a one size fits all answer. CAC only tells you how much it costs you to acquire a customer. It doesn't offer insights into how much revenue is generated from that customer on the initial sale - or, more relevantly, over the course of their life.
Now, in saying that, a good CAC is one that leaves you room to acquire customers profitably and achieve your desired return on investment (ROI). That means you need to compare your CAC to LTV. Or, you can look at industry benchmarks and get a sense of how much your competitors are paying to acquire customers. Furthermore, a “good” CAC for your company is influenced by your unique growth goals.
All of this is to say that CAC is merely the first step to calculating your company’s profitability. So - perhaps a better question is, what is a good LTV CAC ratio for SaaS companies?
What is a Good LTV CAC Ratio for SaaS?
Comparing LTV to CAC gives you a detailed understanding of how profitable your business is. So - what is a good LTV CAC ratio for SaaS? Again - what’s considered “good” varies greatly between industries and individual companies. However, it’s generally agreed upon that a ratio of 3:1 or higher is generally considered healthy for SaaS companies. Why? Simple.
The LTV/CAC ratio compares the amount of revenue a customer is expected to generate over their lifetime with the cost of acquiring that customer. A ratio of 3:1 or higher means that the customer is expected to generate three times the revenue of what it costs to acquire them. In other words, the revenue generated from a customer should be at least three times the cost of acquiring them to be considered profitable.
This means your SaaS company is generating enough revenue from its customers to cover the cost of acquiring them and generate a healthy profit. It also suggests that the business has a strong customer retention strategy in place and is likely to achieve sustainable long-term growth.
However, it's important to note that the ideal LTV/CAC ratio can vary depending on the specific business model, industry, and growth goals. Some SaaS companies with high growth goals may have a lower LTV/CAC ratio, while others may have a higher ratio if they focus on retaining existing customers. Ultimately, you should use CAC SaaS metrics as a guide - rather than a hard and fast rule you must adhere to. You can learn more about how to calculate LTV for SaaS in our blog.
Tips for Improving SaaS CAC Metrics
Before we bring our conversation on the SaaS CAC metric to a close, we want to offer you some advice on improving this metric if necessary. Let’s say your LTV CAC ratio leaves a bit to be desired. Of course, you could focus on raising LTV by reducing churn or raising prices. But to specifically improve your CAC, here is some advice:
- Define your target audience: Understanding your target audience is essential to creating effective marketing campaigns that reach the right people. If your CAC is really high, it’s possible you’re spending capital on the wrong people. By defining your ideal customer persona, you can tailor your messaging, channels, and campaigns to appeal to them specifically and increase the likelihood of acquiring customers who will be more likely to stick around.
- Optimize your sales process: Streamlining your sales process can help you acquire customers more efficiently and cost-effectively. Consider automating lead scoring and nurturing, improving your sales pitch, and leveraging technology like chatbots and email automation to make the process smoother.
- Experiment with new channels and campaigns: Don't be afraid to try new marketing channels and campaigns to see what works best for your business. Consider testing out paid advertising, social media marketing, content marketing, or influencer marketing to reach new audiences and acquire customers more effectively.
- Leverage customer referrals: Referrals are often the most cost-effective way to acquire new customers. By incentivizing existing customers to refer their friends and colleagues, you can acquire new customers at a lower cost while also increasing customer loyalty and retention.
- Measure and optimize: Your CAC today may not be the same CAC a month from now - or 6 months from now. To improve your CAC metrics, you need to measure them regularly and make data-driven decisions based on your findings. Use analytics tools to track your campaigns' performance, experiment with different strategies, and optimize your efforts based on what's working best for your business.
Ultimately, improving your CAC comes down to decreasing any of the costs associated with acquiring customers. This is becoming increasingly difficult as advertising becomes more and more competitive - which is why focusing on improving LTV is just as important as CAC.
Optimizing Your SaaS Business
Hopefully, this complete guide to CAC SaaS metrics provided you clarity on some of the important elements we’ve discussed today, including:
- What is CAC in SaaS?
- Why is SaaS CAC so important?
- How to calculate CAC SaaS metrics
- What is a good CAC for SaaS?
- What is a good LTV CAC ratio for SaaS?
At this point, it’s time to bring our conversation to a close. If you want to learn more about optimizing your SaaS business, explore our blog. We have helpful resources on the best model for bootstrapped SaaS businesses and SaaS subscription management. You can also learn about accounting for SaaS, SaaS hosting, SaaS customer journey maps, and more.
At Whop, we don’t just have helpful resources - we have a powerful solution that allows you to securely handle members, payments, licenses, and more for your SaaS business.
👉 You can get started in minutes with no hiccups along the way. What’s more, you can get your project in front of our vast community to market and scale your business. See what Whop can do for you and your company today.
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