Customer Acquisition Cost, or CAC - it is all about simple arithmetic. If your math doesn’t work for your customer acquisition, your marketing initiatives are not working. It is as simple as that.
The reason I start with that statement is the natural impulse we all unfortunately suffer from. When our CAC isn’t favorable, we try to find reasons to justify it.
“We are in hyper growth stage, so to acquire new customers, we need to spend more and more money”
“We are in a competitive market, so naturally our CAC would be higher”
“Competitor X has started spending much more on their advertising, which is forcing us to spend more as well”
The fact is, most of the times, an inefficient marketing is the root cause of your CAC being at a level that gives you nightmares. But since fixing that is quite a challenging task, we take the easy way out justifying with excuses like these.
Who is CAC relevant for?
Everyone. It doesn’t matter whether you are just starting your SaaS business and looking to acquire your first customers, or you have been in the game for a while now with tens of thousands of customers, your customer acquisition costs and acquisition channels never stop being relevant.
You would note that I use the term customer acquisition costs. Plural. Because that is the right way to look at it. If you want your marketing to yield better results, you need to evaluate the performance of different marketing channels and initiatives independently.
The biggest problem with customer acquisition for a business is the fact that a lot of times, it feels like businesses are leaving it to chance. Sure, they try setting up their ads based on some parameters they think relevant to the business, they even follow some of the best practices they have read about, but without a solid strategy, execution and continuous optimisation, none of that works. It may feel like it works at times, and that is why I said “the outcomes are being left to chance”. If your marketing is truly working, you would be able to pin-point, with conviction, what is working for your business, what should continue working, and why. Most of the times, businesses aren’t able to do that.
To grow consistently, profitably, and in a sustainable manner, we need to think of customer acquisition as a process, not an outcome. It is a process that keeps a close eye on how we are acquiring our customers, monitors how much it costs us to get them through the door, calculates what percentage of them are actually spending money with us, and measures a return on our investment as a function of the revenue generated by these customers.
What is the right way to look at customer acquisition?
Customer acquisition is the process via which your SaaS business is identifying and converting relevant customers, and is doing so in a way that’s not random but measurable, and more importantly, repeatable.
When consulting SaaS founders, I often underscore one of the hidden objectives of their paid campaigns. Generating actionable data. The data your campaigns - free, paid alike - generate is not meaningful just for evaluating the performance of your marketing initiatives, it also helps you strategize and execute future campaigns better. That is what makes your customer acquisition process repeatable.
It is this data that helps you get a precise sense of how you are acquiring new customers, gives you an idea of what’s working and why, helps you hypothesize and test new marketing strategies, initiatives, channels and tactics, and finally isolate the ones that work the best. From there, it is a matter of scaling the most promising and profitable channels to achieve sustainable growth.
And almost every new customer your business acquires comes with a cost. Even the ones that were supposedly free to acquire. Just because you aren’t spending money on promoting your content doesn’t mean it doesn’t cost you to create that content. You calculate customer acquisition cost by your spend on marketing, and marketing efforts , not just on ad spend.
Yes, doing it right is complicated.
For businesses that do not expect multiple or subsequent transactions from their customers, to make their customer acquisition costs work, they need to make sure they are netting more on that first transaction than they spent acquiring the customer.
The greater that difference, the healthier the business would get as it scales up its acquisition efforts.
For SaaS businesses, however, it is slightly better. Since SaaS businesses expect predictable, regular transactions from their customers, they have a higher customer lifetime value than the first transaction, which alleviates the pressure off of them to have even the first transaction profitable.
So, in the case of SaaS businesses, the health of the business isn’t dependent on the net difference in the first transaction (like we saw earlier), rather how long they can have the customer stick around. If your customers stay long with you and keep on using your product, you would be able to spend more on acquiring new customers since even though acquisition would be expensive, the ARPU would be high enough to offset that price tag. This is why retention strategies become even more important for a SaaS business than others.
You can use analytics platforms like Benne Analytics, Google Analytics etc. in combination with your other tracking and reporting tools to get a fair view of your customer acquisition cost for different marketing initiatives. One of the easiest and simplest ways to go about this reporting and attribution is by using UTM parameters.
To figure out the most profitable initiatives for your business, you need to be continuously experimenting with different customer acquisition strategies, targeting criteria, messaging etc. and then attributing the results correctly.
Why isn’t CAC favoring your SaaS business and how to fix it?
By now, we have established that the reason your CAC isn’t what it should be primarily because of the following reasons:
- You are focusing on the wrong acquisition channels. If your customers aren’t around your marketing outreach initiatives, you would be having more misses than hits.
- You are targeting your customers wrong.
- Your messaging isn’t resonating with the customers you are reaching.
We can go on and on, but everything will boil down to these three factors. There are multiple ways of bringing down your overall CAC, but the simplest and easiest way is to increase the contribution of free customer acquisition channels to your overall customers acquired month-on-month. Your free customer acquisition channels would be content marketing, SEO, social media, and to some extent email marketing. But there are a few things you should always keep in mind, irrespective of following the strategy of increasing organic customers:
Always segment your CAC on a per channel as well as individual marketing initiative basis. This will help you set expectations as to how much should you be spending on acquiring each customer through different channels and initiatives. It would also help you identify channels that are making you bleed cash so that you can take corrective measures.
Never compare CAC performance by looking at blended CAC numbers. It will give you a false sense of security and there is not much merit in looking at it that way. Yes, when you are presenting your CAC to a relevant stakeholder, say your investor, you would need to present a blended CAC figure to keep things simple, but as far as formulating strategies and evaluating marketing performances are concerned, always look at individual numbers.
Optimising your campaigns to bring cost down is a marathon, not a sprint. It will be an ongoing process. The more importance you give to this process, the better your numbers will be.
When optimising for conversion, always remember that your landing page contributes more to improving conversion than the actual ad itself. Businesses often make the mistake of fixing their ads, but leaving their landing pages untouched. That is just a recipe for disaster.
Get ready for experimentation. A lot of it. It doesn’t matter whether you are looking at paid channels or organic ones, experimenting with your audience, messaging and product’s positioning is the only way to identify the most promising way to reach customers. If you aren’t experimenting, you are definitely spending more money than you need to.
Let us look at some customer acquisition strategies that can prove helpful in growing your business. We would also look at factors that will help you determine how to prioritize them based on your business goals and objectives.
1. Paid advertising
I have called paid advertising the knee-jerk reaction most entrepreneurs have when they first think of acquiring customers. That’s because this is one of the most common and probably the easiest way to acquire new customers. Easiest, but not cheapest, and if not done right, it can prove to be quite an expensive source.
There are two primary reasons why you should consider running ads on Facebook, Google etc:
They offer an extensive suit of customization and measurement tools that allow you to experiment, analyze and optimize your ads to get the most bang for your buck.
They help you generate crucial data that fuels your understanding of what your ideal customer looks like.
Most businesses focus on #1 when running online ads, but as I mentioned earlier, #2 is what essentially drives your future marketing strategies and roadmap.
While there are countless ways to advertise, I am partial to Facebook and Google ads. When it comes to finding contextually relevant results, nothing beats the accuracy of Google ads, and with the right level of experimentation and optimization, no platform comes close to delivering low CAC to the extent Facebook does. And then there is the lack of extensive customization and optimization capability with most other ad platforms that makes me want to stay away from them.
There are some obvious benefits of getting into paid advertising. It is, unquestionably, the fastest way to grow your traffic. But whether that traffic would be beneficial to your brand, or just you flushing money down the toilet, would boil down to how you approach this channel.
You need to have the right strategy, targeting, understanding of user behavior and psyche. In addition to that, you need to have an unquenchable thirst for experimentations and constant optimisation of your campaigns based on the results from your campaigns.
And that is where the “but” creeps in. Sure paid advertising can be quite lucrative for your business, but it can be absolutely taxing as well. With every passing year, paid ads are becoming more and more expensive, and unless you approach it smart, you can expect your CAC to be headache-inducingly high.
So, take your time and accept the fact that there is a learning curve to the channel. Approach it right, and your business will be in the green. Skip on this crucial step and it would be red all around.
2. Content Marketing and SEO
When it comes to building a long-term sustainable and profitable business, search will always be the king. Consumers use Google for a myriad of different usecases. From researching about an industry, to figuring out the best product that solves their painpoint, it all starts with a simple Google search. So, if you have a sound search strategy backed by a content strategy that benefits your customers, you will see a huge influx of traffic without having to spend for it.
A powerful search strategy helps your business leverage hundreds of thousands of monthly searches bringing in passive, intentional and contextual traffic.
Your search strategy is all about capturing just a small percentage of the massive number of searches happening in your niche and acquiring some of them as customers. It is an initiative that requires strategic planning, meticulous execution, and typically takes time to start bringing in the results. But once the results have started pouring in, you can pretty much depend on it to continue bringing highly qualified traffic your way.
Content marketing is not for the faint of heart. To build it into a long-term sustainable source of traffic, you need to be recognised as an authoritative source of information in your domain, and that needs you to put in consistent effort and an endless focus on delivering valuable content to your customers.
Pro tip: You would find a lot of suggestions on how you can leverage Google’s search algorithms changes and updates to best suit your content and rank higher, but unless you have a massive and dedicated team of SEO experts, I would recommend you to tune out of such information. While it’s true that algorithms change and with that you may need to fine-tune your content execution, algorithm changes will never determine the most valuable content for your audience. The extent of engagement your content witnesses will. So, as long as you are producing valuable content for your audience, and they stay engaged with it, your search rankings will remain more or less consistent irrespective of algorithm changes.
3. Email Marketing
The customer acquisition funnel has always started with generating a lead. Businesses aim at collecting just enough information from potential customers that enables them in either nurturing them to a point where a customer makes a transaction, or retarget them with ads to eventually turn them into customers.
The reason behind generating a lead is quite simple. Most first-time visitors to your site are not going to be making a transaction, so you want a way to have multiple touch-points with the lead before they become a transacting customer.
That is where email marketing comes into play. As far as nurturing and converting leads go, there is no channel that has been more profitable for marketers as email marketing. So, businesses invest quite a bit of their time, energy and resources into building an email list. Most marketing automation systems you see around today use email as the primary delivery mechanism. Yes, these emails are personalised and triggered based on behavioral data from your leads, but at the end of the day, businesses do rely on emails to bring them much needed revenue and growth.
As a matter of fact, there are countless examples where businesses have not only used email collection as some sort of a validation for their product’s demand, but even used it to drive pre-launch revenue. We use it ourselves! ;-)
Another huge advantage of having an email marketing strategy is in the fact that it helps you increase the lifetime value of a customer (once the lead has become a customer). You have the ability to reach out to customers on a continual basis, thereby keeping the customer engaged with the brand, increasing the odds of them transacting with you again in future.
There are a few things that you should keep in mind though.
A/ Your customer is just like you. They hate spam just the same as you. So make sure your email marketing strategy is built around the customer, and not your own brand. Nobody likes to hear someone else continuously talk about themselves.
B/ Quality trumps quantity any day. It is better to have a small, targeted list of potential customers than having a massive list of Toms, Dicks and Harrys. This is where segmenting your email list into different buckets helps.
4. An active social presence
The world has gone conversational. From chatbots to voice assistants to conversational searches, it is all about speaking to your audience. Your customers. And social presence is a huge component of it.
Do not think of your social presence as a way to share updates about your product, promote your offers, or a distribution channel for your content. Your social presence has just one objective. To be social. Whether it is serving the needs of your customers in your domain, or providing support, your social media handles will help you in doing that.
Your social presence is an excellent way for your brand to establish its identity as a customer-friendly business, as well as establish subject matter expertise and domain authority. All of which translates to your audience favoring you more as compared to a competing product, increasing the odds of you converting them as customers.
In addition to these, you can even look at influencer marketing, running traditional ads, having a referral program, or building an online community as means of acquiring new customers.
Each of these channels have their own unique way of being managed effectively, so you should put some thought into what you are going after, why, and how are you going to do that.
Take community, for example. If all your supposed community does is you sharing updates with your customers, and handling their queries, then it is not a community at all. You have an audience, not a community, and you could have had the same effect using a blog with comment module, or even via your Twitter handle. The true power of community is in engagement amongst your audience, irrespective of your participation. So, if you can figure out a mechanism that ensures that, sure - community would work great for you.
What are your go-to strategies to handle rising Customer Acquisition costs? Are you facing any challenges in managing CAC for your SaaS product? Hit me up, I’ll be happy to put our heads together. Let’s turn that frown upside down. ;-)
That’s it for today, see you tomorrow.
Subscribe to Benne Analytics Blog
Get the latest posts delivered right to your inbox