Unlike traditional sales businesses, SaaS businesses are subscription services that assume an ongoing relationship with customers. In other words, the appropriate cost to acquire a new customer must be calculated from the customer’s cost per usage.
If you set the customer acquisition unit price low, you risk losing the opportunity to acquire customers, while if you set it too high, you will not be able to secure profits and your business will not be viable.
This time, we will explain the appropriate CAC (Customer Acquisition Cost) for SaaS businesses.
What is CAC (Customer Acquisition Cost)?
CAC is an abbreviation for Customer Acquisition Cost, which means the cost per customer acquisition. It can be calculated by dividing the total cost of acquiring new customers by the number of customers acquired. The cost of acquiring customers includes all marketing costs for advertising and event exhibitions, as well as sales personnel costs.
CPA is an indicator used to approximate CAC. CPA is an abbreviation for Cost Per Acquisition, which means the cost per customer acquisition and is the same as CAC. However, CPA mainly represents advertising cost per customer, and refers to the cost per customer acquisition per channel in marketing activities.
CAC includes all costs incurred in acquiring new customers and refers to the customer acquisition cost per business unit/product. Additionally, CAC is calculated in three different ways depending on the customer acquisition channel.
①Organic CAC
Organic CAC is the cost per customer acquired without any cost. Specifically, inflows from search engines such as Google and media, word of mouth and introductions from SNS and existing customers are classified as Organic CAC.
New customers can often be acquired through channels separate from marketing efforts. When evaluating marketing measures using CAC, you can make an appropriate evaluation by evaluating them separately from customers acquired through natural inflow.
②Paid CAC
In contrast to Organic CAC, Paid CAC refers to the cost per customer acquired through channels that incur costs. Channels that incur costs for the purpose of acquiring customers, such as advertisements such as listing advertisements, and participation in events such as exhibitions, are classified here.
When evaluating costly marketing channels, you can use this Paid CAC as a guideline for acquisition by calculating and comparing each channel.
③Blended CAC
As the name suggests, Blended CAC is a combination of Organic CAC and Paid CAC. By comprehensively calculating CAC, including both natural inflows and customers acquired at a cost, it becomes possible to evaluate whether the cost per customer acquisition is appropriate for the business.
Importance of CAC (Customer Acquisition Cost)
CAC is a necessary metric to keep your SaaS business in good condition, and calculating CAC allows you to evaluate the following two metrics.
① Evaluate cost effectiveness as an efficient marketing channel
Marketing channels include online measures such as listing advertisements and offline measures such as exhibitions. Among the various measures available, CAC is used as an indicator to evaluate which channel is most efficient at acquiring customers.
CPA determines the unit cost of acquiring prospective customers, while CAC determines the unit cost of acquiring contract customers, so you can evaluate the marketing channels that contributed to revenue expansion as a SaaS business. Additionally, by comparing CAC for each channel, you can adjust your budget and measure the effects of improvements to channels through continuous monitoring.
② Evaluate whether the SaaS business is going well
Unlike traditional sales-based businesses, SaaS businesses expand revenue based on continued use by customers. Therefore, even if you acquire a new customer, you will not be in the black if you only use it once (monthly use).
Therefore, in order to evaluate whether the business is going well, it is necessary to evaluate the health of the business by determining how much the cost of acquiring the customer is relative to the customer’s lifetime value.
.png)
How to calculate CAC (Customer Acquisition Cost)
As mentioned above, CAC is calculated by dividing the total cost of acquiring new customers by the number of customers acquired. In addition, calculations can be divided into periods such as single month (1 month), quarter (3 months), half year (6 months), and whole year (year).
When evaluating each channel as a marketing measure, you can calculate CAC over a short period of time, such as monthly or quarterly, to compare each channel and verify the effects of improvement.
In addition, in order to evaluate whether the investment in marketing itself was appropriate, calculate and evaluate CAC over a long period of time, such as half a year or a full year. It is difficult to evaluate whether CAC alone is appropriate or not; it is evaluated in conjunction with LTV (lifetime value).
What is the appropriate value for CAC (Customer Acquisition Cost)?
As mentioned above, the appropriate value for CAC is evaluated in conjunction with LTV. In conclusion, a LTV three times the CAC is said to be a healthy value for a SaaS business.
The value obtained by dividing LTV by CAC is called unit economics. Unit economics represents the economics of a business unit. If the unit economics is less than 3 or negative, it will be seen as a loss as a result of customer acquisition.
On the other hand, if the unit economics is 3 or higher, it means that the company is in a position to continuously increase profits. However, if it is too high, there is a view that marketing investment is weak and leads to lost opportunities to acquire customers, so it is important to maintain an appropriate value.
The above is just a guideline, and it is also necessary to consider whether it is an acceptable value depending on the business phase. If we are in the expansion phase, we must accept and move forward even if the unit economics is below 3. It is important to judge whether the value is appropriate by comparing it with the business phase.
How to improve CAC (cost per customer acquisition)
If unit economics is below 3 and you want to improve it, there are two ways to improve it: improving LTV and improving CAC. LTV can be improved by strengthening customer relationships by strengthening customer success and introducing CRM tools to improve the unit purchase price and continuation period.
When improving CAC, one possible method is to lower the ratio of paid CAC and increase the ratio of organic CAC. Specifically, we will cancel advertising such as listing advertisements and participate in events such as exhibitions, and will focus on measures that can be taken in-house and at no cost, such as SEO content, webinars, and email marketing.
summary
- CAC is an abbreviation for Customer Acquisition Cost, which refers to the unit cost of customer acquisition, and is further divided into three types depending on the customer acquisition channel: Organic CAC, Paid CAC, and Blended CAC.
- CAC is a necessary indicator to keep a SaaS business in good condition. By calculating CAC, you can evaluate the return on investment as an efficient and effective marketing channel and the soundness of the business.
- CAC is calculated by dividing all the costs incurred in acquiring new customers by the number of customers acquired, and then calculates it over an appropriate period according to the purpose.
- The appropriate value for CAC is evaluated in conjunction with LTV, and it is said that LTV three times CAC is a healthy value for SaaS business.