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How to reduce the Customer Acquisition Cost (CAC)?

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in
Maciej Wilczyński
Managing Partner, Founder Valueships
April 26, 2021
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customer
challange
customer acquisition cost
CAC

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 CEOs 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 Acquisition 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 over 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.

WTP x CAC chart

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 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.


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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 a 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. It’s not a better idea.

Persona infographic

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 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 customer base and the 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:

NDR equation

Reduce the human interaction

Sales expenses are a big part of CAC calculation. While in some cases you can't avoid having multiple calls with customers, not all SaaS businesses 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 at 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 trends 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 learned

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 out (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.

FAQ

#1 What is customer acquisition cost (CAC)?

CAC refers to the expenses incurred in acquiring new customers. It includes sales expenses, marketing spend, ad spend, production costs, and other relevant costs.

#2 How do you calculate customer acquisition cost?

To calculate CAC, divide the total costs associated with customer acquisition by the number of customers acquired within a specific period. The formula is: CAC = Total Acquisition Costs / Number of Customers Acquired.

#3 Why is reducing CAC important?

Reducing CAC is essential for maintaining a healthy business. If the cost of acquiring a customer exceeds their lifetime value, it can negatively impact profitability and sustainability.

#4 What are some ways to reduce the cost of acquiring a customer?

You can reduce CAC by focusing on inbound marketing strategies, optimizing organic traffic, defining your ideal client persona, improving conversion rates, and implementing cross-selling or upselling techniques.

#5 How does inbound marketing help in reducing CAC?

Inbound marketing, such as creating valuable content and optimizing SEO, attracts potential customers organically and at a lower cost compared to paid advertising. It establishes long-term marketing platforms and helps generate leads without continuous investment.

#6 How can defining an ideal client persona reduce CAC?

By clearly defining your ideal client characteristics, you can target your marketing efforts more effectively. This reduces the chances of acquiring customers who are unlikely to generate long-term value, thus optimizing your acquisition costs.

#7 Why is it important to work on conversion rates and cross/up-sell potential?

Improving conversion rates ensures that visitors to your website or content are guided through the marketing funnel effectively. Additionally, maximizing cross-selling or upselling opportunities with existing customers increases their lifetime value, reducing the overall CAC.

#8 How can reducing human interaction help in reducing CAC?

Sales expenses can significantly impact CAC. Minimizing unnecessary human interactions, such as through automated onboarding processes, FAQ sections, and video tutorials, can reduce the time and cost associated with acquiring new customers.

#9 Why is monitoring and analyzing CAC important for long-term success?

Monitoring and analyzing CAC helps businesses understand the effectiveness of their marketing and sales efforts. It allows for strategic adjustments to reduce costs, improve ROI, and ensure sustainable growth.

#10 What is the significance of the customer lifetime value (LTV) in relation to CAC?

Customer lifetime value represents the overall worth of a customer to a business over their lifetime. It should be higher than the CAC to ensure profitability. Monitoring and optimizing both CAC and LTV are crucial for a successful business.

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Maciej Wilczyński
Managing Partner, Founder Valueships

Expert in B2B pricing, monetization and value-based selling strategies. Over the past year, he has completed over 40 consulting projects in Europe. Prior to founding Valueships, he worked at McKinsey & Company, mainly in the TelCo, software, and banking industries. He completed his doctorate in pricing in SaaS start-ups at the University of Economics in Wrocław, where he also lectures.

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Maciej Wilczyński
Managing Partner, Founder Valueships

Expert in B2B pricing, monetization and value-based selling strategies. Over the past year, he has completed over 40 consulting projects in Europe. Prior to founding Valueships, he worked at McKinsey & Company, mainly in the TelCo, software, and banking industries. He completed his doctorate in pricing in SaaS start-ups at the University of Economics in Wrocław, where he also lectures.