How To Buy Customers At Scale: 3 SaaS Companies Share Their Customer Acquisition Cost (CAC)
Is $1,000 in customer acquisition cost (CAC) too much? Maybe it is far too low.
It is impossible to answer that question without knowing more about the company’s margins, goals, and the market. What can tell you is that you are probably thinking about CAC the wrong way. What’s the right way?
The Right Perspective On CAC
The most important question you should ask is, “What’s the most that you can/will spend to acquire a new customer?” – Dan Kennedy, business author, and marketing expert
At first, this perspective might seem wrong or wasteful. In fact, it is neither. It is the realistic way to think about acquiring customers in a competitive market. The first step to optimizing your CAC is to understand it and track that data meaningfully.
Options To Measure Customer Acquisition Cost
There are different approaches to measuring this figure, so industry comparisons are difficult. Generally, I see three approaches to developing this metric.
•Fully Loaded CAC. This is the broadest and best definition of CAC. It includes marketing spending (e.g., marketing talent, agency spend, advertising) and sales spending. Accurately reporting this figure is challenging for many companies especially those under $1 million in annual revenue.
•Basic CAC. This term describes a minimal approach to CAC that mainly focuses on marketing or advertising spending. In some cases, this view of CAC is identical to “return on advertising spend.” This measure makes sense if there is minimal involvement from the sales team.
•Ad Hoc or Estimated CAC. The final approach to CAC is the least precise and most common approach. With this approach, founders and managers use a simple estimation process. Divide the organization’s total spending on marketing and advertising by the number of customers acquired in a given period. This rough estimate typically omits the sales effort by founders and others in smaller companies.
How Tradeshift Reduced Customer Acquisition Cost With A New Channel
At $60 million in annual recurring revenue (ARR), Tradeshift is changing the supplier management industry. With average contract value (ACV) at $500,000, spending heavily to acquire customers makes sense. However, Christian Lanng, CEO, and co-founder of the company wasn’t satisfied with the company’s high CAC and found a way to reduce it. This reduction didn’t involve finding a Facebook Ads hack or changing sales quotas – it was all about finding another channel.
As of late 2017, the company’s payback period on customer acquisition cost declined to 12 months instead of 18. Tradeshift achieved this feat by leveraging partners who already have relationships with target customers. This move has been so successful that 50% of Tradeshift revenues come from partners.
Outsourcing a significant portion of the customer acquisition cost to third parties has worked well for Tradeshift. This approach does pose a new risk – end users may become more loyal to the partner instead of Tradeshift. To continue down this path, the company will need to invest further in partner development and recruitment programs.
Find out more about Lanng’s perspective on SaaS unit economics and his favorite book in his interview on The Top podcast.
Borrowell’s Most Important Metric: CAC
If there is one industry where managing by the numbers is mandatory, it is finance. To earn revenue, FinTech company Borrowell takes a percentage of each loan (1-5%). To make the model work, assessing credit quality is vital. A small spike in bad loans can disrupt growth and potentially sink the company. With hundreds of millions of processed loans, what is the most important metric for the company?
“We’re an extremely data-focused company. As an early stage company, customer acquisition cost is the key metric. You want to grow fast and become an effective marketer,” explained Jeff Goldenberg, the head of growth at Borrowell in a 2016 interview on The Top podcast. The company tracks CAC with the goal of reducing the number over time. That’s an important point – successful companies don’t track CAC for curiosity. Instead, they track it to see which experiments work and if they are making progress in reducing customer acquisition cost.
Digging further into the metrics, Borrowell focuses on cost per application, rather than completed deals. That’s roughly analogous to tracking cost per software demo at a traditional SaaS company.
Spending $700 To Acquire Customers at Bulgaria’s Metrilo
With an estimated valuation of $10 million and over four hundred customers, how does Murry Ivanoff, founder of Metrilo, company think about CAC? Founded in 2014, Metrilo helps e-commerce store owners grow faster by providing email marketing, e-commerce analytics, and CRM tools. Monthly pricing ranges from $119 to $699 per month depending on the customer’s web traffic.
Metrilo’s customer acquisition cost has multiple components, but paid acquisition is the most important part. “We mostly depend on PPC such as Facebook - $20,000 to $45,000 per month on customer acquisition,” says Ivanoff on The Top podcast. In mid-2018, Metrilo’s CAC ranged between $700 to $1200. Unfortunately, the company is not profitable due to its large marketing spend.
There is good reason to be interested in the company’s long-term health. Why? They have a payback period of about six months. If they were pressed to achieve profitability and slow down growth – they have annual revenue growth over 100% - they could probably do it by reducing their advertising spend. Even better, the company’s logo churn is under 5% per month. With those metrics, it is no wonder Metrilo is seeking further investment.
How To Reduce Customer Acquisition Cost Despite Rising Online Advertising Costs
The amount you spend in customer acquisition is a moving target because of competitive pressure. The cost to advertise with Google Adwords alone has dramatically increased since the early days of the platform. While the average cost per click is $1-2, some keywords are over $50 according to Wordstream. If you operate in a highly competitive niche like insurance, expect to pay top dollar for clicks which will make it difficult to reduce your customer acquisition cost.
If you want to reduce your CAC over time, there are a few ways to do it. Experiment with multiple acquisition channels including offline methods like tradeshows. You may also want to start using newer platforms like Instagram. Don’t laugh! A few years ago, many people said that no B2B company could make Facebook work.