Customer Acquisition Cost (CAC) is a very important metric to calculate for every startup to create a well-balanced business model, To understand how much of your monthly ad spend or sales budget should be attributed to a specific win.
Here are my thoughts/understandings to increase Lifetime value (LTV) of a customer and decrease the Customer Acquisition Cost (CAC).
What is Customer Acquisition Cost and how Saas companies are reducing it?
Customer Acquisition Cost (CAC), refers to the resources that a business must allocate (financial or otherwise) in order to acquire an additional customer. It includes every single and effective effort necessary to introduce your products and services to potential customers, and then convince them to buy and become active customers.
To calculate CAC, one needs to include all the expenses made to acquire a customer, for example, the sales & marketing expenses, sales and marketing staff salaries, CRM and marketing automation software licenses, events, sponsorships, Discounts or benefits to customers, content production, social media and website maintenance etc.
How does SaaS calculate customer acquisition cost?
Neil Patel aptly described this metric as, “The One Metric That Can Determine Your Company’s Fate”. Customer Acquisition Cost (CAC) is an important metric for every Saas company.
Let’s see the best way to calculate it.
The Customer Acquisition Cost is calculated by taking the sum of all your sales and marketing expenses over a given period of time (salaries, tools, Expenditure) and divide it by the number of new customers acquired in that same time period.
The Customer Acquisition Cost formula:
Let’s take a look at how new age Saas startups are innovating ideas/ways to reduce the Customer Acquisition Cost and increase the Lifetime Value.
Identify and target prospects precisely
Do you know Saas startups are wasting millions attracting the wrong kinds of people to their websites? To ensure that you aren’t one of them, create a clear buyer persona and target them in the marketing ad campaigns
Preparing a clear buyer persona could be tricky, for example, if you are selling an email marketing tool you have many several buyer personas:
- The marketing manager in an enterprise company
- The CEO at a rapidly growing start-up
Become a thought leader through online content marketing
“Become a thought leader in your field and it won’t matter as much how big you are. Companies and people will look to you for insight and vision. Journalists will quote you, analysts will call you, and websites will link to you.”- Brian Carroll
Thought leadership is not just about what you say or write. It is a way of being. Thought leaders genuinely influence others by creating, advancing and sharing ideas. If you are an expert in your field and passionate about explaining the expertise in an interesting way, carve out time to express the same on different platforms (Podcast, Webinar, LinkedIn and become a speaker in an event). Doing this surely will generate you the best leads which will reduce the Customer Acquisition Cost (CAC).
Automate as many marketing processes as possible
Automating the marketing process will reduce the time and amount of money while helping in generating more leads. To automate marketing, there are several tools in place like email outreach tool and social media integration tools. These tools will reduce manual work and help the companies to reduce the cost.
Focus more on marketing emails and automate the process. Emails are the best and simple ways to generate quality leads. “E-mail remains a significantly more effective way to acquire customers than social media—nearly 40 times that of Facebook and Twitter combined” – McKinsey.
Improve your lead conversions/ Improve conversion rate of the trail and freemium users
Figure out the best ways to deal with the generated leads. Train the sales team in the best ways to convert the trail and fremium user into the paid user. The customer success team can help decrease the Customer Acquisition Cost (CAC) by creating upgrades, upselling and cross-selling opportunities from the existing customers.
Role of a Customer Success team to decrease Customer Acquisition Cost (CAC)
If you’re a software company, you have to make sure your customers are getting value and the value they get every month because they are constantly evaluating whether they want to continue paying a subscription to this software. So for today’s companies, it is not about the initial sell anymore – it is about repeatedly delivering value, and repeatedly demonstrating that value to the customer.
So Customer success managers play a crucial role to increase the lifetime value of a customer and which will eventually decrease the Customer Acquisition Cost (CAC). Below are a few implementations a CSM should work for it.
Advocate customers and invest in it
As customer success teams have higher interaction with customers post-sale, they can create a huge impact on the Customer Lifetime value by constant advice on the best practices to the customer. It’s also important to provide resources so that the customers can help themselves if they’re having trouble using your product.
Instead of creating a new customer, the customer success team should focus on increasing the revenue of the existing customer by upselling or cross-selling activities which will directly impact the CAC and decreasing it.
Improve customer adoption/ Decrease time to value
At the beginning stage, the customer will have more interest to understand and implement the product/ service. The customer success manager should create a faster adoption plan and make the customer see the value within the expected time period. Once the customer understands the output of the product they can derive maximum benefit from the product.
This makes the customer stick with the company which increases the Lifetime value.
Existing customers with a good health score are the main source to create more opportunities to generate additional revenue. Customer success manager has to spend time understanding in depth about customers use case to create more upselling or cross-sell opportunities.
Increase Customer Referrals
Referral marketing is one of the few customer acquisition channels that can scale infinitely, and a customer success team can play a big role here.
As the customer adopts and grows with the company. They will refer to other peers, which will create a great impact in reducing the Customer Acquisition Cost (CAC).
Thanks for reading and hopefully you found the data we shared helpful as you continue to drive success with your customers and team.
Please feel free to reach out if you have any questions regarding the post. Do share your thoughts about the article.