Learn the key metrics that you need to keep a close eye on to determine the overall health and growth of your SaaS startup.
Customer acquisition cost (CAC) is an important metric for SaaS (Software as a Service) companies to track and understand. It helps them determine how much they are spending to acquire each new customers and allows them to optimize their marketing and sales efforts to drive down costs and improve efficiency.
There are several different ways to calculate CAC, and the approach that is most appropriate will depend on the specific needs and goals of the company. In this post, I will talk about the two effective methods for calculating CAC, discuss the pros and cons of each approach, and include two other calculations to keep track of once you have your CAC calculated.
Basic CAC calculation
The most basic way to calculate CAC is to take the total cost of sales and marketing efforts over a given time period and divide that by the number of new customers acquired during that period.
Total cost of sales and marketing efforts: $100,000
Number of new customers acquired: 100
CAC: $100,000 / 100 customers = $1,000
This approach is simple and easy to understand, but it has some limitations. It does not take into account the lifetime value (LTV) of a customer, or the fact that some marketing efforts may have a longer-term impact on customer acquisition.
Weighted average CAC
A more sophisticated approach is to use a weighted average CAC calculation, which takes into account the fact that different marketing channels may have different costs and effectiveness.
To calculate the weighted average CAC, you would first determine the cost and number of customers acquired through each marketing channel. You would then weigh these values based on the relative importance or effectiveness of each channel, and sum them up to get the overall CAC.
Marketing channel 1: Email marketing
Number of new customers acquired: 20
Weighted value: (20 customers * $10,000 cost / 20 customers) = $10,000
Marketing channel 2: Social media advertising
Number of new customers acquired: 40
Weighted value: (40 customers * $20,000 cost / 40 customers) = $20,000
Marketing channel 3: Referral program
Number of new customers acquired: 10
Weighted value: (10 customers * $5,000 cost / 10 customers) = $5,000
Total weighted value: $10,000 + $20,000 + $5,000 = $35,000
Total number of new customers acquired: 20 + 40 + 10 = 70
Weighted average CAC: $35,000 / 70 customers = $500
In this example, the weighted average CAC is $500, which is lower than the basic CAC calculation. This is because the referral program was particularly effective at driving new customer acquisition at a lower cost, and therefore had a higher weight in the calculation.
It's important to note that the weighted average CAC calculation requires data on the cost and number of customers acquired through each marketing channel, as well as a way to weigh the relative importance or effectiveness of each channel. This can be more time-consuming and require more data than the basic CAC calculation, but it provides a more accurate and comprehensive view of customer acquisition costs. And applying the weighted cost approach helps you get visibility into your most effective channels and where to double down to drive your growth into T2D3!
Once you have your CAC, there are two things to keep track of to keep a finger on the pulse of your SaaS company's health.
Once you have your CAC, it is important to use the LTV:CAC ratio, which compares the lifetime value of a customer to the cost of acquiring that customer. The LTV:CAC ratio is calculated by dividing the lifetime value of a customer by the CAC.
Lifetime value of a customer: $5,000
LTV:CAC ratio: $5,000 / $1,000 = 5
The LTV:CAC ratio is a useful metric because it helps companies understand the long-term value of their customer base and how much they can afford to spend to acquire new customers. A high LTV:CAC ratio is generally considered to be a good sign, as it indicates that the company is generating a good return on its investment in customer acquisition.
CAC payback period
This one is my personal favorite. It basically answers the question of “When do I get my money back?”.
The CAC payback period is another metric that can be used to evaluate the effectiveness of a company's customer acquisition efforts. It is the amount of time it takes for the revenue generated from a new customer to pay back the cost of acquiring that customer.
To calculate the CAC payback period, you would divide your CAC by the average revenue generated per customer per month. For example, if the CAC is $1,000 and the average revenue generated per customer per month is $100, the CAC payback period would be 10 months.
The CAC payback period is a useful metric because it helps companies understand how long it takes for their customer acquisition efforts to pay off. A shorter payback period is generally considered to be more favorable, as it indicates that the company is generating a good return on its investment in customer acquisition.
It's important to note that the CAC payback period is not a standalone metric and should be considered in conjunction with other metrics such as LTV:CAC ratio and overall profitability. A company with a high LTV:CAC ratio and a short payback period is likely to be more successful in the long run than a company with a low LTV:CAC ratio and a long payback period.
Here is an example chart showing the CAC payback period calculation:
Average MRR per customer: $1,000
CAC payback period: $10,000 / $1,000 = 10 months
What about industry benchmarks for these SaaS metrics?
I will share some numbers, but with a caveat, before I start. These metrics can vary widely depending on the specific industry, business model, and other factors, so there.
What is a good LTV:CAC ratio?
In general, an LTV:CAC ratio of 3-5 is considered to be good, while a ratio of more than 5 is considered to be excellent. However, it's important to keep in mind that these are just rough guidelines and may not apply to all businesses.
What is a good CAC payback period?
As for CAC payback period, less than 12 months is generally considered to be more favorable for investors (some even push as far as 9 months), as it indicates that the company is generating a good return on its investment in customer acquisition. However, the appropriate payback period will depend on a variety of factors, including (and especially) the lifetime value of a customer, your company's profit margins, and your overall business model.
It's worth noting that these benchmark numbers should be used as a guideline, and not as strict targets. It is important for businesses to understand their specific circumstances and determine the metrics that are most relevant and meaningful for them.
If you are serious about growing your SaaS company in a healthy way with solid marketing foundations and a go-to-market strategy that is not cookie-cutter, then let’s talk. Otherwise, I hope this information has helped you, I wish you all the success in your SaaS journey.
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Co-founder and CEO at Kalungi, Fadi has helped SaaS companies grow with Inbound Marketing strategy and tactical best practices. as well as Marketing & Sales alignment to generate over $100MM in LTV for companies around the world.