In the B2B SaaS marketing world, there are so many metrics that it can be easier for a beginner to get confused.
One of those metrics is Customer Acquisition Cost (CAC).
So what is customer acquisition cost and why is it important for B2B SaaS businesses?
What is Customer Acquisition Cost?
Often referred to as CAC, customer acquisition cost is a key metric that helps B2B SaaS companies to determine how much they need to spend to acquire each subscriber.
Essentially, customer acquisition cost is the cost incurred when acquiring a new customer or subscriber.
To calculate your customer acquisition cost, you need to divide the cost you incurred on all sales and marketing activities by the number of new customers you acquired.
Here is the simple formula.
To ensure the profitability of your SaaS business, you should ensure your customer acquisition cost is as low as possible.
Why Is Customer Acquisition Cost Important?
To sustainably scale your SaaS company and improve revenue, you need to strike a balance between growth and marketing expenses.
Understanding how much it costs your company to acquire a customer is at the heart of growing your business in a scalable and profitable way.
No matter how great your software product is, customers will not find it unless you market it successfully.
In that case, you will need to launch a solid sales and marketing strategy which will require you to spend time, money, and resources to promote your product.
Figure out this—the average customer acquisition cost for B2B SaaS is $205 (organic CAC) and $341 (inorganic CAC):
Image First Page Sage
What do these statistics mean?
You need to understand your customer acquisition costs to figure out marketing strategies to dedicate your money and resources to acquire customers for your subscription business.
Similar to other SaaS growth metrics, customer acquisition can be a source of competitive advantage when adjusted appropriately.
That’s why it’s listed among the top 5 KPIs that actually matter for a successful SaaS subscription business model by Younium.
That said, here are reasons why CAC is vital for your B2B SaaS subscription business.
1. Helps to Improve ROI
In the words of Peter Drucker, a renowned management theorist “What gets measured gets improved.”
But figure out this:
Although it’s one of the key metrics to prove the effectiveness of marketing for 96% of companies, ROI is the most complex metric to calculate for 47% of marketing leaders, according to a study by Allocadia.
Image via Allocadia
Fortunately, understanding the customer acquisition cost can help you determine which marketing strategies or lead generation software to leverage to acquire more customers while minimizing costs, thereby improving the overall ROI of your B2B SaaS business.
For instance, assuming you’re using several marketing channels to acquire customers, by leveraging CAC, you can easily determine the most cost-efficient way to generate more subscribers for your product, hence you can allocate money and resources accordingly.
2. Improves Decision Making
According to a Attrock article, even though companies use sales techniques to generate more customers, only a few have a clear and well-documented sales strategy.
By evaluating customer acquisition costs you understand how much you need to spend to acquire new customers which can help you launch effective sales and marketing campaigns.
Evaluating this metric further provides you with a practical mechanism that can help you simplify the decision-making process.
For instance, if say you were using search engine optimization and PPC to gain new subscribers for your software and you notice that you’re spending more on PPC to acquire the same number of customers as with SEO, you could decide to focus your efforts on SEO and drop PPC.
Without understanding your customer acquisition cost, you will struggle to make even short-term plans for your product.
Therefore, CAC should be at the heart of your SaaS marketing strategy and should inform all the decisions you make.
3. Helps to Boost Profitability and Profit Margins
By evaluating your CAC, you can successfully analyze the value generated from each customer you acquire and boost your profit margins.
For instance, assuming that the value generated by each customer you acquire is $55.
If you’re using several channels to promote your product, it would be easier for you to choose the most cost-effective channel. It also helps you figure out what cost-efficient lead generation software to leverage for your B2B SaaS.
This ultimately helps to improve your profitability as the amount you’re spending to attract each customer is lower than the value the same customer delivers.
Pro tip: If you’re planning to start a subscription-based business but you aren’t sure where to get started refer to this roundup of 5 Incfile alternatives by SmallBusinessHQ to determine the best business formation service for you.
Conclusion
Granted, every B2B SaaS business wants to grow. However, determining how to scale your sales and marketing activities while maintaining long-term value is never an easy task.
By understanding your customer acquisition cost, you can get a starting point for determining the most cost-effective customer acquisition channels that you should focus your time, money, and resources on.
Therefore, whether you’re trying to optimize your sales and marketing efforts or you want to grow your business despite the cost, understanding your CAC is a great idea.
