How to Calculate Customer Acquisition Cost (CAC) for SaaS Businesses

Customers are the backbone of your SaaS business. Without them, businesses can collapse quicker than they were built. However, acquiring customers can come at a high price. 

To help you navigate these challenges, we’ve analyzed industry data and identified key actionable strategies. By taking advantage of SaaS KPIs, you can better understand some critical factors driving customer acquisition costs—eventually, make a better decision on how to implement impactful measures. 

With thorough research of the market, we present to you some phenomenal tactics to reduce high customer acquisition costs for SaaS businesses. Alongside that, we will discuss the different industry insights, how to calculate CAC, and average customer acquisition costs across various sectors.

What is Customer Acquisition Cost?

Customer acquisition cost (CAC) is the key growth metric for evaluating customer profitability and sales efficiency. It consists of marketing, sales, and other operational costs involved in converting prospects into paying users. It is closely related to customer lifetime value (CLV). 

CAC helps SaaS companies determine how much money they are spending to acquire a new customer.

CAC is mostly used in every other industry but its most common use case is found in SaaS companies, due to their subscription-based model. It helps in making multiple resource allocation decisions.

What is a Good Customer Acquisition Cost for SaaS?

Every industry has its own standards of costs of customers acquired. In SaaS, a good CAC can be calculated by finding the ratio between customer acquisition cost and customer lifetime value. 

The average cost ratio to acquire customers is 3:1. Three parts to customer lifetime value and one part to CAC. This is because the value of customers acquired must be lower than that of its lifetime value. As a result, this number will bring profit to the organization and reduce your expenses. 

As long as you stay below the average costs of your industry, your business is in good hands. If the ratio is 1:1, the money required to both acquire and retain the customer is equal.

If the ratio is less than 1, the acquisition cost is much higher than the ROI that the customer can bring to the business. This is no good since you are at a loss through such a transaction.

However, if your CAC is 3:1, this implies your CLV is thrice that of CAC, suggesting a strong margin of profit through this transaction. 

Use the following formula to find the ratio of customer lifetime value to CAC.

How to Calculate Customer Acquisition Cost?

Calculating customer acquisition costs for your company is quite simple. You need to divide sales and marketing costs by the total number of customers acquired. 

Follow these steps to effectively calculate the CAC of your campaign.

Step 1 – Choose a time period depending on your business cycle. Be it a month, quarter, half, or a full year.

Step 2 – Sum up the total cost of acquisition, including the sales and marketing costs, ad spend, promotions, and other miscellaneous expenses in this timeframe.

Step 3 – Count the total number of new customers added to the campaign during that period. 

Step 4 – Divide the total expenses by the number of new customers added to the campaign. 

The following customer acquisition cost formula can help in calculating the customer acquisition cost for the campaign.

Customer acquisition cost formula

The following customer acquisition cost formula can help in calculating the customer acquisition cost for the campaign.

Average CAC for SaaS example:

For further clarity, take an example of a SaaS company that spends $50,000 on sales and marketing in a month. The associated costs are SEO, Google Ads, and social media campaigns. Fortunately, during that same month, the company acquires 500 new customers.

Using the formula:

CAC = $50,000 ÷ 500
CAC = $100 per customer

What does this imply? This means the company spends $100 to acquire each new customer, which is below the average CAC for B2B SaaS in some industries.

The total sales and marketing expenses go beyond just Google Ads and SEO marketing. It also includes the following:

• SEO marketing – For website and blog optimization 
• Google Ads – For effective online advertising
• Social media marketing – To reach out to social media users
• Promotional giveaways – For effective promotional marketing
• Cold calling and emailing – To reach out via emails and calls
• Third-party content writers – For writing blogs and articles on the web
• Affiliates and brand ambassadors – For any shoutouts through affiliations and brand ambassadors.

So far, we’ve covered the essential customer acquisition cost formula, and concepts surrounding Customer Acquisition Cost (CAC). Now it is time to know the average CAC for B2B SaaS for a better understanding of the industry benchmark.

Average Customer Acquisition Cost with Industry Benchmarks

The average cost of customer acquisition varies based on the industry. Let us understand a few things about these industries.

According to a recent report on the SaaS industry, the average CAC of different sectors was displayed. It stated that:

• The average CAC that the SaaS industry incorporates based on 22 different sectors comes down to $702.
• The most expensive industry to acquire customers from is the fintech industry with an average of $1450.
• The cheapest industry to acquire customers from is the eCommerce industry with an average of $274.

The table below will display the average CAC numbers for different sectors of the SaaS industry.

Uncover some game-changing facts and growth hacks in the next segment to reduce your CAC and fuel sustainable growth!

How to Reduce Your Average Customer Acquisition Cost?

SaaS companies are mainly concerned about their CAC and how they can reduce it to a minimum. Keeping low-cost CAC is their only motive. Let us take a look at some strategies to lower the CAC of an organization. 

Let us take a look at the best methods to lower the CAC of an organization.

1. Identify and understand your target audience

Lowering your average CAC cannot be done without understanding your audience’s needs. One of the ways to optimize your CAC is by focusing on an audience that shows active interest in your product/service. This helps to eliminate efforts and costs for an audience not interested in your product/service.

Another excellent way of identifying and understanding your audience is by hosting churn surveys. They not only help in understanding the audience but also offer suggestions through audience feedback about what changes you can make in the strategies to lower your CAC. The typical good churn rate for SaaS companies ranges between 3-5%.

2. Optimize your sales funnel to reduce overhead costs

Your sales funnel is something you have full control over. Hence, it is easier to control than other things on this list. Optimizing your sales funnel can help lower your overhead expenses so you can focus on the CAC. 

A sales funnel (also called a conversion funnel) helps to analyze the areas that require improvement to convert the customer quicker. The sales rep can then pinpoint these areas and eliminate any major concerns and issues with them. 

Taking better action can help you to convert your clients quicker, resulting in an increased conversion rate. Hence, your average CAC can be lower than intended. 

3. Test new strategies to drive better results

There are a lot of differences between multiple websites and sectors in a given industry. To attract new customers and add them to your existing customer list, you need to make a lot of changes to your website. Better marketing strategies can get you the result you desire. 

Changing your marketing strategy can also help you focus on lowering your average customer acquisition cost. New advertisement techniques can also help in lowering your CAC. Hence, different strategies will inform you about the audience’s different needs and how to target them effectively. 

Lastly, A/B testing is another incredible way to figure out the requirements of your target audience. This method executes two different strategies at once to figure out which one works the best. This method can save companies a lot of resources and money as it accounts for the dynamic market change as well. 

4. Audience segmentation for targeted marketing 

Segmenting the audience can help in targeting your marketing efforts to the right leads. This can be used to personalize the user experience for a specific client and potentially convert him/her. 

Customer segmentation is performed by analyzing data-driven insights about potential customers. Once you identify the desired customer profile, you must focus on it as these customers are more likely to convert. 

Make sure to segment the audience based on in-app activities. This helps companies to understand their existing customers better and streamline marketing campaigns according to their audience’s interests. 

Finally, sales reps can encourage these potential clients through in-app marketing messages to make some moves that lead to conversion. As the company gains more customers, the average CAC will go down for them.

5. Customer referral programs can reduce the average CAC

Another popular method of lowering your CAC is by implementing a referral program in your campaign. This will encourage more customers to buy your product, reaching a global audience. 

Software companies like Dropbox, Google, and FreeAgent offer different referral programs in their sales campaign. With proper organization, referral programs can reach a global audience virtually. Besides enhancing your ad’s reach, referral programs also build efficient brand awareness and loyalty for your organization. 

The existing customers who had positive experiences with your brand will recommend it to more people and create a network. This helps in not only lowering the average CAC but also expanding customer outreach and loyalty. 

6. Understand what other businesses are doing

One of the best things to do as a part of your marketing strategy is to learn from other businesses. Other examples in your sector can be a reference to the things you need to do right with your sales campaign.

You need to learn the different strategies that these companies utilize. This can be done either by gaining first-hand experience on the job or looking at what other companies are doing in the same sector. 

The former approach will help in coming up with innovative ideas and strategies while the latter will aid a newcomer to adjust accordingly to the industry. Hence, the average CAC will be impacted positively if you make the right decisions for the company through these strategies. 

7. Monitor your metrics frequently to catch the pain points

Besides checking out other companies, tracking your company’s SaaS metrics is also beneficial to its CAC. This will help you understand the areas in which you need improvement in your marketing strategies. 

You can also view the elements that go right and the ones that don’t work with your audience. This will also help in predicting where the market is going and how the industry can change. 

Hence, SaaS KPIs can help in identifying the strategies you need to work on to reduce the average CAC of the organization.

Retain Your Customers through Convenient CAC

Customer retention is another one of the highly-practiced marketing techniques. Since it is less expensive to retain a customer than to acquire one, companies generally like to retain their customers. 

Retaining your customers not only delivers higher CLV but also leads to lower CAC. This is why a SaaS company believes it is easier to go for customer retention than individually lowering CAC. With a low CAC, companies can focus on shifting their allocated resources to somewhere more important. 

LabsMedia helps in lowering your customer acquisition costs through multiple SaaS strategies. With the right marketing strategies and accurate KPIs, your business can allocate its valuable resources elsewhere.