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Cost of acquiring customers or Customer Acquisition Cost is considered to be one of the most crucial metrics for all businesses but they are particularly an important metric from a SaaS perspective. Digital Marketing channels today are no longer countable on one hand, and for SaaS companies trying to get B2B or B2C customers, covering the right channels to reach their target audience is of high importance. Having worked with founders who wanted to understand the cost of not just running a campaign or creating collateral for a particular channel, we tried approaching our campaign success metrics with focus on lowering the CAC as much as possible for achieving better margins and profitability while also considering the lifetime value of the customer. Based on some of our observations across diverse campaigns, we have compiled some of our observations around the impact of digital marketing on CAC.
What exactly is CAC?
Cost of Acquiring Customers is a metric which helps businesses determine the overall spend from all aspects such as operations, marketing, etc., to calculate how much exactly the business has to spend to acquire a paid customer. CAC is also useful for determining the lifetime value of a customer where the lifetime value (LTV) of a customer needs to be four times at least of the cost of acquiring the customer.
For the purpose of this blog, we are considering the different expenses be it salaries or operational expenses to be constant and analysing only the marketing spends to understand how marketing spends can be utilised most effectively and efficiently.
Is CAC important for my SaaS?
First time founders, especially in the tech world, often have this question after hearing the term. The cost of acquiring a customer is highly important for a SaaS as an important business metric even for investors. Consider a SaaS which has an average ticket size of $4.99 monthly subscription and spends $10,000 per month on resources (content, design) and ad spends, all of which gets the SaaS about 30 new customers. Now, the monthly spend per customer in marketing is about $335 for a subscription of $4.99. Method has helped multiple SaaS bring down their CAC to about 50% of the average ticket size. A combination of organic and inorganic efforts are often essential first to set a baseline for your business’ CAC and then working on tactics to bring costs further down to 50% of ticket price. Considering the above example if you had to understand why $335 for a $4.99 paying customer is preposterous is because the lifetime value for each of those 30 customers becomes about $1200. Now, for a $4.99 monthly subscription, you can calculate exactly how many months the customer needs to be buying a subscription to achieve the LTV. Without trying to get into the returning users and product stickability, we try to achieve numbers which ensure the SaaS startups don’t burn too much of their budget in such directionless marketing attempts.
What exactly is CAC used for?
CAC is a key SaaS metric that informs business owners with a subscription-based model about important decisions for each of their teams. Sales teams can use CAC to gauge the efficiency of their teams, tools, and processes. Marketing teams can use CAC to identify the most effective channels and tactics. Finance can use CAC to inform budgeting decisions. Management and the board can use CAC to determine how and when to deploy capital, as well as for crafting the financial story to raise capital and determine when additional capital will be required.
Why is CAC considered an important business metric for SaaS?
CAC is one of the most foundational metrics for determining sales efficiency, which is highly important since it drives critical decisions as your SaaS continues to scale. Sales efficiency is determined by calculating how much revenue is generated for each dollar spent on sales and marketing. Sales efficiency is something businesses rely on to decide how much to invest in sales and marketing and what level of returns to expect from the investment.
How is CAC helpful in calculating the unit economics for my SaaS?
CAC as a business metric is not just a quantification of how much it costs to acquire a single customer but it is also an estimate of how long it takes to get returns from the spends based on the customer lifetime value. Both CAC and LTV are essential to understanding the profitability of a SaaS business since they play an important role in valuations.
How to calculate CAC of digital marketing for my SaaS?
While the cost of acquiring a customer is taken as a cumulative of all expenses that go for acquiring a customer, in the context of digital marketing, taking into account the expenses behind the effort for that particular channel is more accurate. While in the previous example we have taken a cumulative of the expenses across different channels, in order to be more accurate when calculating the CAC for independent channels. Some of the digital marketing channels of importance are Search Engine Optimisation, Social Media Marketing, Programmatic Ads, Affiliate Marketing etc.
The basic formula for calculating CAC is by dividing the sum of total marketing and sales spend by the total number of new customers acquired. As you work towards optimising your customer acquisition cost, you’ll also want to track performance in different channels, calculating your paid CAC (social ads, Google ads, and other paid advertising), content marketing/organic CAC (marketing costs associated with email marketing, organic search marketing, and website development and improvement), outside sales, inside sales, etc. Breaking down your CAC in this way will make it easier to identify opportunities for improvement.
How to calculate CAC for organic marketing?
Customer Acquisition Cost or Cost of Acquiring Customers for organic marketing efforts is taken as a cumulative of all the costs associated with marketing through organic channels and efforts such as organic search engine marketing, website development, user interface and user experience improvements. To break it down further, we take a look at which expenses you should consider across different organic channels.
Search Engine Marketing- be it Google search or bing, ultimately all websites on the internet aspire to appear as the top result on search engines so as to be discovered by their target audience. From keyword based targeting to website core vitals, appearing as a top search result is no child’s play, now even more difficult with AIO and Zero-Click Searches. But there always is a cost associated with organic efforts and that holds true for search engine marketing as well. Producing helpful, authoritative and EEAT compliant content has been the key factor which helps websites appear as top search results. But just producing content is not enough to climb up the ladder in search algorithms, core web vitals like page speed, loading times etc. are also crucial for determining whether your page appears on the first page of the search results or if it is buried on page 100. When it comes to search engine marketing, the costs associated would be those to produce content and maintain the technical side of the web pages (page speed, mobile responsiveness etc.). Usually founders have content resources in-house and a tech team in place to take care of the technical aspects. In case of founders lacking an in-house resource, the cost of hiring a freelance content creator is taken into account.
Social Media Marketing- From X (formerly Twitter) to Facebook and Instagram, to the newest kid in town- Bluesky, businesses and brands have ensured their presence on all major social media channels over the years turning social networking into a point of contact for customer service. Be it keeping in touch with the target audience or providing them with updates to interacting with customers and coming up with new features, social media platforms have evolved into a serious channel of communication for businesses. Facebook led the move by making the platform more business-friendly with business profiles, Facebook shops, marketplace etc. as X followed suit for creators and businesses. Over the years platforms like Facebook, Instagram, X, YouTube, TikTok etc. have evolved from being a channel where friends kept in touch with each other virtually to businesses considering them important channels of distribution and communication. The costs associated with organic social media marketing is more to do with creating content, design and executive resources for creating, posting and promoting content around your SaaS.
How to calculate CAC for paid marketing campaigns?
SaaS businesses frequently use Google's Display Network and social media platforms (Facebook, Instagram, TikTok, YouTube) for paid advertising. This involves bidding for keywords on search networks or boosting content on social media. Regardless of the platform, campaigns operate on a pay-per-click (PPC) or pay-per-action model.
Calculating Customer Acquisition Cost (CAC) for paid ads involves accounting for design, video, content, and platform spend. On Google, businesses bid for keywords, paying per click (PPC), though now conversions are also tracked. High competition, especially with larger companies, can lead to bidding wars. Similarly, on Meta platforms, ad visibility depends on the daily budget.
Beyond channel spend, CAC also includes the cost of creating visuals and content, plus the time and resources for managing and optimising campaigns.
Can a campaign be successful but cost inefficient?
A campaign can meet objectives but be cost-inefficient. For example, if an AI startup's Meta Ads campaign acquired 200 customers for a discounted $0.99 subscription with a $400 spend= a $2 CAC. However, if none of the acquired customers renewed at the $9.99 price this would make the effective CAC skyrocket. Even if just 2 customers decided to stay on at the original price ( a common dilemma with such discounted campaigns), the true CAC would be $200, requiring 20 months of renewals to break even. Despite initial face-value success in acquiring discounted customers, the campaign failed to secure long-term paying customers, resulting in a high true CAC and lack of sustained success.
