With the continued growth of Internet-based companies, especially those in the SaaS space, new metrics are being used to measure the success of Internet-based marketing campaigns.
Customer Acquisition Cost, or CAC, is a metric that is growing in popularity among companies and investors as web-based marketing campaigns offer more analytics and customer tracking capabilities than traditional advertising methods.
As you have probably figured out, CAC is the cost of convincing a potential customer to buy your product or service. Another measurement to keep an eye on is LTV, or lifetime value of your customers. This metric measures the projected revenue your business will gain from a single customer. What do these metrics mean for your SaaS business and how can you improve your CAC and LTV? Let’s begin by exploring how SaaS businesses and investors are using CAC to measure SaaS businesses.
Performance & Scalability
CAC can be used by early stage investors to measure the performance and scalability of new technology companies. By looking at the difference between the amount of money that can be extracted from customers and the cost of extracting it, investors can measure just how profitable a new company could be.
Marketing departments can also use the CAC metric internally. As CAC measures the cost of acquiring a new customer, marketing campaigns can be optimized for a greater ROI. By improving your CAC metric with more effective marketing campaigns, investors will be more favourable to your SaaS business.
How it works:
CAC is calculated by dividing all costs spent to acquire customers during a certain period of time by the number of customers acquired during that same period.
CAC = Marketing and Sales Costs / Number of New Customers Added
There are some downsides to this metric. CAC does not take into account new markets or new business. If your SaaS business is expanding to a new region, your CAC calculation can be non-representative compared to your normal markets as you may spend more to launch in a new region. This opens up the idea of using several CAC calculations, to better represent various markets and marketing channels.
Knowing your CAC for each of your marketing channels will help improve how you allocate resources for each channel. However, this will depend on how you and your company define customer acquisition. If you measure how well your PPC ads are performing, you may want to take into account the blog posts you use to reinforce them.
How to Improve Your CAC
As you begin to use CAC internally, you’re going to find areas to improve on. How are you going to get your SEO and Inbound Marketing campaigns to be as effective as your PPC campaigns?
Here are a few tips to improve your CAC metrics:
Almost every successful company is using some form of customer relation management software these days. CRM can be used to manage email lists, blogs, loyalty programs, and other methods of gaining and maintaining customer relations.
Improve Conversion Metrics:
Google Analytics is a great tool to use to measure site performance. Improving your speed of your website, optimizing your website for mobile viewing, and improving your landing page will all have an impact on improving your customer acquisition numbers.
Enhance User Value:
Take into account feedback you receive from customers to improve your service and its features. By adding value to what your customers are paying for, you can improve customer retention. Keeping your customers happy can ultimately turn them into advocates of your service and it’s worth noting that word-of-mouth advertising is still the most effective form of advertising. Improving customer retention will improve the lifetime value of your customer.
How to Calculate Lifetime Value, or LTV:
Lifetime value, or LTV, is a useful metric to estimate your SaaS business’s marketing costs. The simple way to measure the LTV is to measure average customer value by the average amount of time each customer stays with your company:
LTV = (Average Customer Value Per Month)(12 months) x (Average Customer Lifespan)
LTV is meant to provide a rough measurement to estimate marketing costs and project growth of your business. The LTV will vary among SaaS business and customer types.
For more information about how to grow your SaaS business, contact us today at 250-380-2299. McAllister Marketing is a Victoria, BC based firm that’s expert in branding, advertising, graphic design and new media.