More than a developer, a SaaS entrepreneur needs to be a good marketer and a salesperson to stay competitive in the SaaS startup market today. Your SaaS business needs customers to generate revenue. And you need to invest in marketing and sales to bring customers and sustain your customer base.
But how much can you invest in marketing and sales? Indeed, it cannot be a ballpark figure, you need to be precise. Otherwise, you will be pouring money into the drain.
To gauge your marketing and sales effectiveness, you need to look at your Customer Acquisition Cost.
What is Customer Acquisition Cost?
Customer acquisition cost (CAC) is the total amount of money a business spends to acquire a new customer. It includes marketing, sales, and customer service costs.
The CAC should not include any ongoing expenses such as hosting or maintenance fees. These are part of your operating expenses that you must pay regardless of whether you have customers.
How to calculate Customer Acquisition Cost?
You can calculate the Customer Acquisition Cost of your SaaS Startup by dividing the total marketing, sales, and customer service costs by the total number of users.
However, the most useful way of calculating your Customer Acquisition Cost is to calculate it over a period.
Calculating your Customer Acquisition Cost over the short, medium, and long term can give you useful insights.
You can calculate your Customer Acquisition Cost monthly, quarterly, half-yearly, and annually. It helps you to eliminate biases and identify patterns to optimize your marketing and sales strategies.
For example, a new marketing strategy to qualify leads at the top of the funnel itself may temporarily increase your Customer Acquisition Cost for a month or a quarter. But generating qualified leads helps increase your conversion rate and reduce your churn rate effectively.
It can effectively improve your CAC over nothing less than a year, which you may fail to notice in the short term.
Importance of Reducing your Customer Acquisition Cost:
Reducing the Customer Acquisition Cost is necessary for any business growth. But, as a SaaS Startup, you can benefit a lot more by reducing your Customer Acquisition Cost.
It is because the SaaS environment is highly competitive to win over customers. It is also flexible for the users to easily switch over to a different service. Though you may manage to retain a number of customers, a few customers will continue to leave your service after a period. It is called the churn rate of your business.
The amount of money a customer brings to your business from becoming a customer to churn is called the customer’s Lifetime Value.
One of the best ways to ensure whether your customer Acquisition Cost is optimal or not is by looking at your LTC:CAC ratio.
If your average Customer Lifetime Value is less than the average Customer Acquisition Cost, it means your business is losing money. If you cannot improve your CAC-LTV ratio to 1 or above, your SaaS may lack the product-market fit.
Your business will be at a loss even if your CAC is equal to your average customer LTV. It is because you will be spending money on product development and business operations as well.
Hence, one of the indirect ways to minimize the impact of high Customer Acquisition Costs is by increasing your Customer’s Lifetime Value. You can do it by improving customer success and upselling to your customers.
It can also be more effective since it typically costs 5x more to acquire a new customer than retain an existing customer.
Ways to Reduce Customer Acquisition Cost
Here are the 7 easy ways you can reduce the Customer Acquisition Cost for your SaaS Startup.
1. Understand & Define User Persona
A high Customer Acquisition Cost could mean that you may be targeting the wrong audience.
It is easier to cut down your Customer Acquisition Cost when you reach the right people with the right solutions. You need to understand what type of person would use your product. This way, you can create targeted content that resonates with them.
To do that, you must create a user or a buyer persona. It allows you to define the characteristics of a buyer’s persona and work within those boundaries. Having a better understanding of your user persona helps address their pain points effectively. You can better demonstrate how your SaaS product can help them achieve success.
A clearly defined user persona not only helps you reach the right audience but also makes your marketing and sales process effective. Eventually, it all contributes to reducing your Customer Acquisition Cost.
2. Align Marketing & Sales Teams
The more time your leads spend in the pipeline, the more it is going to cost you to convert them.
Your potential customers go through the marketing funnel and the sales funnel before they become paying customers. If your marketing and sales teams are not aligned, your leads will be spending more time in the funnel.
It will ultimately increase your Customer Acquisition Cost.
Your marketing team can generate and qualify more leads when they work with the sales team. They can develop and optimize the user persona, share insights on what makes a prospect more agreeable, which pain points help connect with the prospect better, etc.
Measures such as these help optimize your marketing and sales processes. It helps you reduce your conversion time effectively and in effect, your Customer Acquisition Cost.
3. Optimize Your Marketing Strategy
Reducing your Lead qualification time from the moment of Lead generation is a great way to reduce your Customer Acquisition Cost. Optimize your marketing strategy and your marketing funnel so that you can qualify your Leads faster.
One of the effective ways to do it is to filter out as many unqualified Leads at the top of the marketing funnel as possible.
Here are a few steps that help you optimize your marketing strategy and funnel:
- Create tailored marketing content targeted at your user persona.
- Ensure your marketing content is in line with your user requirement and your offer.
- Distribute your content in different marketing channels.
- Optimize your content appropriately for the marketing channels.
- Follow metrics and focus more on customer-preferred channels.
Lead enrichment is one of the crucial factors that help you qualify your leads faster.
For example, marketing strategies like offering gated content or conducting webinars can help you generate high-quality leads.
Moreover, you can use a simple feedback form for Lead enrichment of your webinar participants. Effectively, you reduce the time and resources spent on generating and qualifying Leads, in turn, reducing your CAC.
4. Optimize Your Sales Process & Pipeline
Optimizing your marketing funnel helps you fill your sales funnel with Marketing Qualified Leads.
From there, your Sales team will be nurturing and identifying Sales Qualified Leads so that they can convert them.
Lead Nurturing is one of the most time and resource-consuming processes for your Sales team. One key factor your Sales team can capitalize on is that, if you can identify Sales Qualified Leads sooner, you can convert them sooner.
Employ Lead Prioritization techniques in your Sales process to identify leads that are ready to convert.
It effectively reduces your average conversion time and frees up your sales pipeline for more MQLs.
Sales enablement tools help you build a strong relationship between your sales and marketing teams.
They allow your salespeople to access information about prospects and make informed decisions quickly. This helps you close deals faster and reduces your lead nurturing cycle.
You can automate repetitive tasks by using sales enablement tools. For instance, you can set up automated emails to send to your prospects based on certain triggers.
5. Increase Customer Retention Rate
It costs 5x more to acquire a new customer than retain an existing customer.
But how can retaining your existing customers help reduce your CAC?
Most of your marketing and sales expenses go towards increasing your brand awareness and brand trustworthiness. One helps you reach more leads and the other help your convert your leads faster.
Among several marketing channels, your existing customers are a reliable channel to reach new leads and make them your customers.
You can get your customer testimonials or create a SaaS community to promote UGC or initiate a referral program, etc. All of these are great ways to generate more high-quality leads. Since leads coming via existing customers trust your brand, they are easy to convert.
These are some of the great ways to reduce your Customer Acquisition Cost.
Customer acquisition cost (CAC) is the amount of money it takes to acquire a single customer. It includes all the costs involved in acquiring a new customer.
The main aim of any business is to increase its revenue and profit. But, this cannot happen without first focusing on reducing their CAC. It is one of the vital factors you must pay attention to before you can grow and scale your SaaS business.