How to reduce the Customer Acquisition Cost (CAC)?
Acquisition & Growth
April 26, 2021
If the money needed to get the customer aboard is higher than the overall worth of the deal (Customer Lifetime Value/LTV), then the business can't be viable.
How much, on average, do you spend on acquiring a paying customer?
If you don't know the answer to this question, then the good news is that you're not the only one. I speak with dozens of SaaS CEO's every month, and I rarely get any precise information on their acquisition costs. Usually, I hear rough estimations based on a gut feeling rather than any measured metrics.
The bad news is that you might be overlooking one of the critical factors of your company's growth. As much as it can be tempting, especially in the early business stages, to chase clients with no regard to its cost, in the long run, you want to keep a healthy ratio between your sales&marketing expenses and their outcome.
In this article, you will learn:
- Why reducing CAC is so essential?
- What are the ways to reduce the cost of acquiring a customer?
- Why is inbound marketing the most proficient way to do so?
Why reducing CAC matters?
The idea is trivial, but understanding it is crucial to running a healthy SaaS company. If the money needed to get the customer aboard is higher than the overall worth of the deal (Customer Lifetime Value/LTV), then the business can't be viable.
Every year, the Customer Acquisiton Cost (CAC), whether your product is a freemium model or not, increases. At the same time, the Willingness to Pay (WTP) for SaaS products decreases in time.
Every year it’s harder to acquire a customer who, due to the commoditization of the SaaS market, wants to pay less for subscriptions.
That's why you should manage your CAC consciously, and by doing so, I mean to keep it on the lowest possible level.
How to reduce CAC?
Paid advertising vs organic traffic
Paid ads have significant advantages, as you can reach your target audience directly and then optimize these efforts with various tools. The downside of paid traffic is that to optimize the CAC to a certain level, you need to go through costly tests, after which you still need to spend a specific budget on maintaining the flow of leads. The rule is simple: the more leads you want, the more money you need to put in the ads, and if you don't put the money, then the leads won't come.
Eventually, with paid ads, you will reach a certain level of CAC, which will be impossible to go below. That's why, to reduce the Customer Acquisition Cost in the long term, you should invest in Inbound marketing and organic traffic. A piece of content that is well-positioned through good SEO or domain authority can drive you leads for months or even years without you investing more money in promoting it.
You should become friends with your website, newsletter, blog posts, videos, e-books, reports and any other pieces of unique, target-oriented content. Not only you will invest in a cost-efficient source of customers, but you will also build independent marketing platforms that you have complete control of.
Define your ideal client
Customer persona, buyer persona, ideal prospect, you name it. You need to have it (or them) well defined if you want to acquire clients faster and cheaper. In one of our previous blog posts, we've mentioned that pulling in the wrong customers increases churn rates, but so it does to acquisition costs. You can't sell efficiently unless you know who is the exact buyer.
Look at that from the investment perspective. Any time you acquire a client, you “invest” in them. This is your CAC. Then you bet on their lifetime value (LTV), which should pay back within few months. If you lose customers due to churn, the money is lost. That’s why it’s critical to bring only these customers who can bring the money in the long run.
Define key characteristics of your ideal client, such as their age, position or desired business outcomes. If you create a blog post or prepare content for a paid ad, ask yourself a question: does it address the needs of my buyer persona? Will the Sales Director or the CFO find this piece of information interesting?
If the answer is no, you need to redefine who should be the actual receiver of your content and adapt your sales and marketing efforts accordingly. You don’t want to waste money on ineffective acquisition channels and tools.
You can try using Hubspot’s guide: https://offers.hubspot.com/persona-templates
Work on your conversion rates and cross/up-sell potential
Once you've established an inbound marketing strategy and defined your ideal persona(s), you need to make sure that when someone lands on your website (or any piece of content), you have the proper tools to push them further in the marketing funnel.
I've found that most SaaS companies focus primarily on the bottom of the pipeline and care about converting the registered users to clients. At the same time, the top of it, the visitors, remain unattended. In a way, this is understandable because we tend to care more about those who pay us or are relatively close to doing so. Yet, you're not using the full potential of your marketing efforts, thus increasing the CAC.
To avoid it, evaluate each step on the marketing funnel and work on your visitor-to-lead conversions. Analyze your website's heatmap, work on your CTA buttons and contact forms, clarify your Value Proposition and Selling Points and communicate them.
Another thing is your organization’s capability to cross/up-sell the current client base. Yes, you need to have the right pricing strategy for that. Look at your existing customers base and flows between the plans and add-ons. Do you see any movements there? There should be some. Try calculating your net dollar retention, which is a perfect metric telling if a business can generate money without acquiring any new customers:
Reduce the human interaction
Sales expenses are a big part of CAC, and while in some cases you can't avoid having multiple calls with customers, not all SaaS companies can afford it. If your average user's LTV is $50,000, then investing time in video calls might be worthwhile. If it's $500, then as little as three phone calls can make your CAC surpass the overall profit of the deal.
To reduce acquisition costs caused by sales expenses, you should be facilitating the human interaction between you and the user to the necessary minimum. At the end of the day, your client also wants to spend as little time as needed to understand your tool and make use of it.
Ensure that you communicate the value of your tool in every point of touch with the customer. Mark all questions that your leads and users ask you, and publish the answers in the FAQ, blog posts or video tutorials. Before any onboarding call, send a survey to the client with the same questions you'd ask on the call. It might turn out that you can cut the call's time to 50% or even wholly.
Luckily, with all no-code/low-code trend happening within the SaaS world, you should be okay with creating onboarding processes (e.g., UserOnboard), necessary landing pages (Webflow/Figma), and automation integrations (Zapier).
What we have learnt
In the era of freemium models and market commoditization, your potential customers want to pay as little as possible, and their acquisition becomes more challenging every year. For this reason, you want to keep a healthy (meaning: low) cost of acquisition.
Inbound marketing is one of the greatest, if not the greatest, way to do so. It's a long-term process, and for its fruits, you need to wait for a couple of months or even years, but it is an effort worth taking.
If the inbound strategy is well thought (personas!) and iterated over time, it will help you keep your acquisition process cheap. Think of it not just as a "cool way to promote your brand", but primarily as a powerful business tool to accelerate your growth and keep your key metrics on the right level.