18 Apr What is Customer Acquisition Cost (CAC) for SaaS and How You Calculate It
If you have recently started your SaaS company and it is growing at a sure and steady pace, understanding the concept of customer acquisition cost (CAC) beyond the surface level is mandatory, even if at first sight it seems more of an overkill.
However, most companies grow so fast that they hardly realize how much they spend in the process.
This article will help you understand exactly why you should have a clear idea of what your CAC is. Especially if you are looking to optimize your profits. But first, what is the customer acquisition cost or CAC?
Customer Acquisition Cost Definition
Client Acquisition Cost (CAC) is the cost incurred by a company in order to gain a new customer. The statistic is utilized in many sectors, but it is especially essential in SaaS because the whole business model depends on the customer’s lifetime value.
Most new SaaS startups invest a lot of resources before they can reap returns. It is therefore essential to examine the number of months needed to fully recoup the initial investment and start turning in profits.
As the SaaS business model is heavily reliant on the customer’s lifetime value, analyzing the customers is crucial to the growth of the business.
The cost of customer acquisition allows you to fully evaluate how your revenue and profits will be as your business expands. To contextualize this, acquiring and maintaining customers who are willing to pay may be costly and end up being detrimental to your business. On the other hand, freemium users can also burden your revenue model hence it is important to find a balance.
How to calculate your Customer Acquisition Cost
To determine your CAC, just add up all of your marketing and sales expenses (including expenses on human capital) during a specific time period and then divide it by the total clients acquired during that time period.
The following equation can be used in the calculation:
CAC=Total Cost of Sales and Marketing/ Number of customers acquired
In summary, understanding your Customer Acquisition Cost will guide you in picking your customers based on how much your business stands to profit. And this is ultimately the secret to maximizing the revenue of your SaaS.