Determining Customer Acquisition Cost for Tech/SaaS Companies
Building a strong customer base is critical for companies in the Technology and SaaS industry. But do you know how much your business is spending to achieve new customers?
Maybe you're underspending, and your business isn’t investing enough in marketing and sales. If this is the case, your business risks losing out on bringing in new revenue.
On the other hand, perhaps your business has certain issues with sales and marketing efficiency. If revenue from a customer is less than your business is spending to acquire that new customer, then you may have to price your technology or software too high – which can slow down the sales process even further.
You Can’t Manage What You Can’t Measure
The key here is to measure the costs of getting new customers so you can manage your marketing/sales budget and strategy, and adjust accordingly. This is where customer acquisition cost comes in.
Customer Acquisition Cost for Tech/SaaS
Customer Acquisition Cost (CAC) is a metric used to determine the total average cost your company spends to turn a sales lead into a new customer.
To calculate CAC: Take your total sales and marketing spend for a specific time period and divide by the number of new customers for that time period.*
- Sales and Marketing Costs: Include items such as advertising spend, business blogging, social media management, SEO, salaries, commissions and bonuses, overhead for that time period (month, quarter, or year).
- New Customers: Total number of new customers for the same time period (month, quarter, or year).
Formula: (Sales and Marketing Costs) / (New Customers) = CAC
*Note: If a sizeable portion of your total marketing and sales expenses is for retaining existing customers, rather than acquiring new customers, then subtract that amount from the total marketing and sales expense.
Adjusted Formula: [(Total Sales and Marketing Costs) - (Total Customer Retention Costs)] / (Number of New Customers)
What’s a Good Customer Acquisition Cost for Tech/SaaS Companies?
A good customer acquisition cost really depends on your business model. Generally, you want to have a low average CAC. However, there are times when a high CAC makes sense if your customers also have a high lifetime value. For instance, if you have a lot of repeat business, and if those repeat customers spend a lot of money, then they have a high lifetime value. And, the higher the lifetime value, the more you can afford to spend to acquire new customers.
Why should I care about CAC?
By determining your CAC, your business will have a clear picture of exactly how much it costs to acquire new customers. This number can serve as a simple scorecard that will allow you to make adjustments and refine your sales or marketing processes in stride.
Once you’ve taken the first step to calculate your customer acquisition cost, then you’re ready to dig deeper. You’re ready to examine the bigger-picture ROI of your Tech/SaaS marketing and sales efforts.
To help you understand six of these critical marketing metrics, we’ve put together a guide: 6 Metrics Tech and SaaS Companies Should Be Tracking.