What Is a Good CAC for SaaS?

What is CAC and why is it such an important consideration for SaaS businesses?

More importantly, what counts as a ‘good’ CAC in the industry, and how can you tell you’re on the right track?

Got questions? You’re not the only one. Read on for all things CAC for SaaS companies – plus a few tips of our own about how to use and optimize this metric to get the most out of it.

What is CAC and how do you calculate it?

CAC (Customer Acquisition Cost) is the amount you have to spend per new customer you onboard. It helps sales and marketing teams understand how well their campaigns are performing, and whether they are allocating their budget to the best possible resources for the job.

If you’re a SaaS business, CAC is vital if you want to:

• Grow sustainability: how sustainable is your customer acquisition strategy in the long term – is your spending proportionate to the revenue your customers generate?
• Assess profitability: CAC helps you make informed decisions about pricing, marketing channels, and customer segments to build healthy profit margins.
• Improve strategic decision making: CAC helps senior management and finance teams allocate resources, whilst marketers and sales teams can use it to gauge campaign efficiency and sales processes.

How to calculate CAC?

Calculating CAC is relatively straightforward. All you need is the number of new customers you have gained over a period of time (a quarter, or over the course of a particular campaign, for example) and your sales and marketing expenses for the same period. These should include:

• Advertising spend across all platforms (online, print, out of home)
• Your teams’ salaries, commission, and expenses
• Marketing costs for activities such as content creation, email marketing, SEO
• Payment processing fees
• The cost of any software you use over this time period

Your CAC is your total marketing/sales expenses divided by the number of new customers you have onboarded from these efforts.

Let’s say you’re a SaaS tech startup, and you want to calculate your CAC for a four month campaign you run that won you 100 new customers. To do so, you’d first make a list of all your campaign expenses:

Expense	Cost
Ad spend	$4,000
Salaries	$20,000
External support	$0
Payment processing fees	$600
Software	$400
Total	$25,000

Dividing this total ($25,000) by the total number of customers (500) gives you your CAC – $250 per customer.

What do SaaS businesses need to bear in mind for CAC?

Many of the considerations for SaaS businesses surrounding CAC are based around the subscription model. Whether you bill monthly, quarterly, annually, or by usage, you’re spreading the overall value of your services across ongoing payments.

This means that it can take longer for SaaS businesses to get a return on their investment in acquiring new customers. If this period becomes too lengthy, then CAC can chew up a substantial amount of your working capital as you wait for the investment to pay off. And, if your churn rate is high, this pay off may not ever arrive.

This means that it’s vital for SaaS businesses to:

• Keep CAC low by opting for cost-effective, fast-payoff ways of reaching new customers
• See ongoing customer retention strategies as a key strategy for sustainable growth
• Look for ways to shorten payback periods

What is a good CAC for SaaS?

It’s tricky to give an exact number here. If your CAC is $250 per customer, but you make that back via monthly subscription fees of $200 over two months, it seems like a reasonable investment. You’re only eight weeks away from that customer being profitable.

If your CAC is $250 per customer, but your customers pay a $5 monthly subscription fee, it’s going to take a long time to make even that investment so your CAC is too high.

Our top tip: use your CLV as a benchmark

CLV (Customer Lifetime Value) is a measure of the average amount of revenue your customers generate, from their first engagement with you to the time they stop purchasing from your business.

Because SaaS businesses vary so much in scope (consumer vs B2B, across a range of industries and geographies), defining a good CAC isn’t about identifying a one-size-fits all dollar value. Instead, take relative values into account.

A ‘good’ CAC for SaaS businesses should be higher than your customer LTV. This means that the revenue generated by your customers outstrips the costs associated with onboarding them.

A ratio of 3:1 (CLV:CAC) should be your target here.

In other words, you should aim to generate at least three times more revenue than acquisition cost per customer. Higher ratios are ideal, but 3:1 is a great starting point to benchmark for.

For example, if your customers (on average) spend $1,500 with you, and your CAC is $500, that’s a ratio of 3:1. Equally, if your CLV is $60, and your CAC is $20, that’s also a ratio of 3:1.

Whilst the two CACs here are vastly different, they each generate the same amount of value, proportionally speaking – and can both be seen as a ‘good’ CAC for their respective businesses.

4 Tips for SaaS businesses who want to improve their CAC

1. Diversify your marketing strategies

Maxing out on direct, targetable channels that land your ads in front of audiences that are actively searching for products like yours will get you more leads. More leads for the same ad spend = a solid chance that more will convert.

Whilst long-term strategies like content marketing and organic SEO are absolutely worth putting in the effort for in the long term, support these with channels that are designed to drive revenue, fast. Investing in PPC advertising gets you ready-to-convert leads faster, so your investment brings in more customers and reduces CAC.

2. Make sure your targeting is on point

Why waste resources advertising to overly-broad audiences, most of whom will never buy your product?

Using your marketing and sales resources to target the groups that will engage with your products most and have the most need for them – your CAC will tumble, and your leads will shoot up. Invest time into researching your ideal buyers and crafting in-depth buyer personas to act as a reference point for future campaigns.

You could also check:

• Whether your target audience fits your product’s price point – are you pricing out your ideal customers (or on the flip side, could you up your prices and generate more revenue)?
• Whether B2B sales teams are targeting senior decision makers with genuine purchasing power, rather than junior team members with limited input

3. Invest in customer retention strategies

Ok, you got us – this isn’t strictly about bringing CAC down as it is about bringing CLV up. Ultimately though, it’s all about maximizing the return you get on your customer acquisition costs, and that’s very useful.

The key here, for subscription-based businesses, is to remember:

• That it’s easier than ever for competitors to find and switch to a rival vendor
• That long-term customer loyalty depends on customers feeling satisfied at all stages of their journey with you – not just the first couple of months!

Investing in customer retention is therefore vital in maximizing the value your customers offer. Continuing to develop your relationships with your customers after those initial contracts have been signed will bring in more $$$ in the long-term, so you get more from that investment you made in acquiring each customer.

4. Know when to rely on external support

Is there a blind spot in your sales or marketing team? Perhaps a particular channel which, whilst everyone’s vaguely familiar with, no-one holds any particular expertise in?

It’s often cheaper, faster, and more effective to outsource to an external agency in these cases – you’ll get access to an entire team of experts ready to optimize your strategy straight away, rather than a drawn-out hiring process for a singular in-house hire.

And whilst the initial investment in the agency may increase your costs in the short term, the right agency will optimize your strategy for lead generation and conversion, so that the investment more than pays off in decreasing your CAC.

Reduce your CAC with expert support

At Velocity, we’re all about building customized SaaS PPC campaigns that minimize CAC and maximize the amount of leads you generate per dollar spent.

We can give you a solid starting point for calculating (and reducing) your CAC, but to know exactly which strategies would be most effective, we need to know a little more about your business goals.

If you want to find out more about our Google Ads services and how much they cost, get in touch today for a quick chat – we love meeting people, and there’s no pressure to commit to anything after the conversation.