Death by Customer Acquisition Cost & How Startups Can Prevent It
Your customers are the heart and soul of your company. And having a strategy to constantly acquire new ones may seem like the key to paradise. Right?
But if you’re in charge of expanding a SaaS startup’s customer base, there’s something you should know. According to data compiled by ProfitWell, SaaS customer acquisition costs have increased by 50% in the last five years alone. And with rising economic instability & fierce competition, this isn’t good news.
If defining a SaaS customer acquisition strategy already required considerable energy and resources, now reducing CACs (customer acquisition costs) is becoming more and more crucial. It's easy to continue doing what works. But the SaaS climate is changing, which calls for new strategies.
In this guide, you'll discover:
- What customer acquisition is
- How to calculate your SaaS customer acquisition cost
- How to run a sustainable customer acquisition model
- The most common customer acquisition channels for startups
- Startup CAC benchmarks
- How to reduce your CAC
Ready? Let’s get started!
What Is Customer Acquisition?
SaaS customer acquisition refers to all the actions a SaaS company takes to acquire new customers. Regardless of your sales strategy and your marketing mix, you probably have 3 key customer acquisition goals:
- Attracting leads
- Nurturing leads until they're ready for sales
- Converting leads into customers
With this in mind, people tend to ask if customer acquisition is a marketing process. The answer is “not exactly.” While marketing will have ownership over some aspects of your customer acquisition process, it should also involve sales & product specialists.
On the other hand, while conversion funnels are a great way to modellize your customer journey, conversion can happen at any stage.
And, before a lead buys, they’ll go through several “micro-conversions”. Micro-conversions are instances where a lead reinforces their interest in your solution.
A micro-conversion may consist of:
- Subscribing to your newsletter
- Booking a free demo
- Signing up for a free trial or plan
But what about the costs? Let's get to it.
How to Calculate Your SaaS CAC
Here's the deal: When we talk about customer acquisition cost, we're talking about how much it costs an organization to get a new customer.
What to Include in your CAC
A simple way to calculate CAC is by adding up your sales and marketing expenses and dividing the result by the number of new customers you got. But, what expenses should you include?
We recommend you consider:
- Content production & distribution costs
- Your ad spending
- The salaries of your sales & marketing team
- The cost of your sales & marketing SaaS stack
A sustainable business model must consider its CAC along with what is called Lifetime Value (LTV). But, what is LTV?
CAC & Customer Lifetime Value
Customer lifetime value is a metric that consists of how much revenue you’ll get from an account before it churns.
For sustainable growth, you'll want a positive LTV:CAC ratio. In short, you'll want your LTV to be higher than your customer acquisition cost. A healthy LTV:CAC ratio would be of at least 3:1. Thus, your customer’s lifetime value would be 3 times higher than their acquisition cost.
If that seems impossible, it’s time to rethink your sales & marketing spend.
CAC and LTV should be as important to your business strategy as your MRR (Monthly Returning Revenue). But, as we’ll see later on, there are other metrics you should keep in mind as well.
To understand a little more about SaaS customer acquisition cost, let’s explore the difference between customer acquisition techniques and customer acquisition channels.
Common Customer Acquisition Strategies & Channels
When talking about SaaS customer acquisition, it's important to distinguish between the channels you’ll use and the strategies you plan to employ.
Why? Your strategies and channels will be tightly intertwined. In a sense, your channels will highly determine your strategy and restrict how much you can optimize your CAC.
Some of SaaS startups’ favorite acquisition channels include:
- Organic search
- Social media
- Traditional advertising
- Email marketing
- PPC ads
Let’s dive into each one, and explore some common strategies for each.
Organic search drives 53.3% of all website traffic. Additionally, SEO leads are usually more informed about the problems you solve than leads that encounter your brand through other channels. And, as if that weren’t enough, they tend to be cheaper to acquire.
Common strategies to acquire customers through organic search include:
With over 4.74 billion people using social media, your audience is likely to be there as well. SaaS startups using social media as a customer acquisition channel usually adopt a combination of organic and paid strategies.
Why? In a sense, social media is a great channel for enjoying some of the benefits of organic content (lower CAC & brand-building) and paid strategies, combined.
When done on the correct platforms, PPC social media ads can help you engage a large audience that’s ready to convert. In fact, paid social media is a great example for diving into how customer acquisition channels & strategies relate.
You can spend the exact same budget on delivering the same message to an audience on two different social media platforms and see wildly different results.
It may sound outdated, but traditional advertising channels (television, radio, or print media) may be suitable for large enterprises exclusively. Television ads make up 33.5% of all ad spend worldwide. And thousands of startups are choosing traditional channels.
If you’re considering traditional ads, we recommend exploring these possibilities:
- TV ads
- Radio ads (or podcast ads, as a digital alternative)
- Magazine ads & guest columns
- Placing street ads in relevant zones (your city’s tech hub, for instance)
You may feel like you don’t have much control over earning referrals from your customers. But you can still motivate them to recommend your company.
If you’re getting most new business from referrals, establishing a referral program is an option worth considering.
Almost no marketer questions the power of email as a way to connect with customers, nurture leads & provide extra value. But there’s a distinction worth making: Email marketing is consent marketing. Unless your breaking the GDPR, all your subscribers have consented to joining your mailing list. That’s not the case with outbound emails.
It’s quite common for small teams to shy away from cold mailing. It feels aggressive, pushy, or risky. And reply rates are famously low. But cold mailing is 40% more efficient as a customer acquisition channel than social media marketing. So it may be worth trying out.
Attending industry events may sound like an outdated customer acquisition strategy - but it works too well not to mention it.
Interested in leveraging industry events & conferences?
We recommend you:
- Set a clear goal and aligning your team around it
- Promote your presence through your social media channels of choice
- Invest in a powerful booth design (or any other sales asset you plan to use)
- If possible, use the event to set in-person appointments with leads that you nurtured online
- Follow-up with everyone you met
PPC (pay-per-click) ads are online advertising campaigns where you pay for each click your ad gets. PPC ads are a great way to quickly attract attention to a product or service, and often offer a higher return on investment than other types of digital advertising.
The worst downside of adopting a PPC strategy is that you need a constant direct investment to maintain them in the long run.
Additionally, PPC campaigns are best for low-risk, highly-legible offerings. However, a technically complex, expensive and highly niched-down product is unlikely to see significant and sustainable results with PPC.
Startups investing in PPC usually leverage:
- SERP ads
- Display ads
- Retargeting ads
CAC Benchmarks: What’s the Average Startup CAC?
Wondering about the average cost of customer acquisition? Below is a graph that plots the cost of customer acquisition cost for 1424 SaaS companies across 5 funding brackets.
On the Y-axis we see what companies pay to get $1 in new annual recurring revenue. On the X-axis we show the revenue earned by those same companies.
According to these SaaS customer acquisition benchmarks:
- Startups spend an average between $0.28 and $0.94 to get $1 in new revenue.
- Companies that raised $1-$10 million spend $0.54 in their early stages
- Companies with over $50m in ARR spend $0.77 to get $1 in new recurring revenue
- SaaS companies with less than $100 million in revenue scale CAC faster
- Their CAC goes from $0.44 to $1.29 of spending to get $1 in new annual recurring revenue up from $1M to over $50M
In short, these SaaS customer acquisition benchmarks show that after the $10M-$50M ARR landmark, startups across the funding spectrum either rise or stabilize their CAC.
There are two exceptions:
- Bootstrapped startups
- Startups with over 100M in funding
Bootstrapped startups will experience an increase in CAC until they reach $10M-$50M ARR. After that point, CAC will decrease significantly. And after the $10M-$50M ARR landmark, highly-funded startups will decrease their CAC from an average of $1.18 to $1.
How to Reduce your CAC
Wondering how to reduce your customer acquisition cost?
- Constantly testing new marketing channels. Take an interactive approach. Conduct low-scale marketing experiments often.
- Retargeting users. Use a mix of email marketing & ads to re-connect with stale leads. How likely are they to convert? There’s a 70% probability of conversion.
- Rethinking your sales strategy. If your sales representatives are consistently failing to hit their quota, it may be time to rethink their strategy, training & stack. When it comes to sales training, for every dollar you invest, you’ll get about $4.53 in return. That is a 353% ROI.
- A/B testing. Test, test and test. Don't let ineffective efforts drag on for too long.
- Examining your funnel. If you’re spending too much on marketing and sales while converting too little, your marketing funnel may be failing to take prospects from point A to point B.
- Launching a referral program. If you’re growing through referrals, consider creating a system to reward them. Additionally, it’s worth mentioning that referred customers cost an average of 20€ less than those acquired through outbound methods.
- Launching an affiliate program. Think of affiliate programs as a cost-effective way to do influencer marketing. They allow you to connect with creators’ audiences and award them based on their results.
- Investing inSEO. Most successful startups swear on SEO as a long-term authority-building & customer acquisition channel.
- Focusing on retention. Retaining a customer is cheaper than acquiring a new one. Plus, customer loyalty increases your LTV, which can leave you with more room for experimenting with your CAC.
In this post, we covered everything you need to know about Customer Acquisition Cost & how to reduce it.
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