Of all the stages of the SaaS commerce lifecycle, new customer acquisition is easily is one of the most critical factors that determine SaaS growth. But in addressing the needs of SaaS customer acquisition, many companies end up wasting precious time, money and resources in the wrong strategies, channels and metrics. The wrong approach is, in fact, responsible for dwindling subscriptions, decreasing recurring revenue and inevitable failure that befall many an unfortunate SaaS company.
What exactly is CAC?
Customer acquisition is the first step in your funnel and refers to the process of “winning” a customer. That is, persuading a user to subscribe for your service. The number of prospects that successfully convert into paying SaaS subscribers determine your customer acquisition rate. The average amount you spend in acquiring a subscriber is your customer acquisition cost (CAC).
For sustainable SaaS growth, you need: 1) High customer acquisition rate; 2) Low customer acquisition cost; and 3) Accelerated customer acquisition speed. Customer acquisition speed typically refers to the average amount of time it takes for you to acquire a customer, or simply, the time between generating a lead and closing the sale.
How to calculate CAC:
Divide your total sales and marketing cost for a cycle by the number of customers who subscribed successfully to get your CAC. Thus, your CAC for a quarter where 10 customers are acquired after spending a total of $100,000 on sales and marketing is $10,000.
CAC = Total Acquisition and Marketing Costs / Total New Customers
Why is CAC important?
Since much of the focus in subscription-based business models is on customer retention and maximization of customer life-time value (CLTV), SaaS companies often tend to overlook the urgent importance of accelerated customer acquisition. And agreed, reducing churn, boosting retention and increasing cross-selling or up-selling are important- however they are not enough.
To grow your SaaS user base, you need to acquire new users and you need to acquire them at an accelerated pace.
What is the right approach to SaaS customer acquisition?
The right approach involves choosing a relevant model. Your typical options include:
a) Free trial model;
b) Freemium model;
c) Internal sales model; and
d) Enterprise model.
Each model has different CAC and requires different levels of marketing campaigns. The widely accepted approach is one that allows you to reduce CAC such that CLTV is at least three times higher than it, or more.
What are some of the ways to increase SaaS customer acquisition?
SaaS businesses looking to increase acquisitions while lowering the cost need to adopt innovative strategies, which include:
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