“If you torture the data long enough, it will confess to anything.”

                                                                              – Ronald Coase

An interesting fact of business metrics: the more you use them, the more data driven you to become. But one thing is true, once you truly tame your number, you will never want to play without them again.

Running a subscription business company is just like the same thing. Here you have to tame your customer because the whole subscription business model is base on long-term customer relationship.

By chance, if you frightened your customer, then seriously get ready for some nasty surprises.

For a subscription based company metrics like churn, lifetime value, monthly recurring revenue (MRR) and customer acquisition cost are the leading indicators of revenue.

Also read: 5 essential SaaS metrics for subscription-based software sales

Among them, the most important metric SaaS Company must look is Customer acquisition Cost (CAC) and Life Time Value (LTV) because this metric work as a  crystal ball for SaaS Company which give them information whether they need more resources to get more benefit or they should apply break to it.

So, today in this article, we will look why CAC is the most important metric in Saas business. But first, we have to know what CAC really is.

What is CAC?

CAC refers to the amount of money or resources a company invest to acquire a new customer.

It includes every single effort necessary to introduce your products and services to potential customers, and then convince them to buy and become active customers.

CAC does not include only product cost, it includes research, marketing, and advertising costs.

But, remember if you want profit, your CAC cost should be less than the overall value of the customer in the entire customer life-cycle.

The importance Of CAC in SaaS business.

In SaaS business, customer acquisition cost is one of the key metric indicators. Most SaaS business are investing lots of time and money before they have ever seen a return on that investment.

But, as the time passes this CAC metric began to matter because your customer starts to pay for the monthly subscription services and you actually start to get your money back which you have invested earlier.

Here are two key reasons which help you to understand better why CAC is important in SaaS business.

It helps you to optimize your CAC and LTV ratio.

If you want your SaaS business to be profitable then you have to  manage your LTV/CAC ratio by optimizing Sales and Marketing output.

For this, you constantly need to optimize your channels and tactics  to ensure you’re optimizing the ratio and generating enough profit as humanly possible.

For profit, your CAC ratio must be lower than your LTV ratio.

Determining and optimizing your payback period

Payback period is defined as the number of months a company requires to payback its cost of customer acquisition.

In SaaS business when a company acquires a new customer, it means that company has lost money.

To move forward the company need to get that upfront money back as soon as humanly possible.

Think of payback period as the next layer of CAC in the fact that it reveals a much more dense look at how your channels and business as a whole are doing from an acquisition front, especially if you’re employing a freemium model.

Ok, let see how we can calculate CAC

Basically, CAC can be calculated by the sum of all sales and marketing expenses over a period of time divided by the number of a customer acquired in the same period of time.


For example, if a company spend $36,000 on sale and marketing in a year and Acquired 1,000 customer in the same year. This means their CAC is $36.



To understand better let us dive into an example.

First is the example of an e-commerce company which has a poor metric.

A fictitious e-commerce company that sells organic food products, Last month the company spends $100,000 on an advertisement and its marketing teams says that 10,000 new orders were placed.

This gives us an idea that last month the company has a CAC of $10. For an e-commerce, this figure has no meaning in itself.

But, if a Mercedes-Benz has a CAC of $10, the Mercedes management team will be happy in looking at the year financial statements.

In case of an e-commerce company, this CAC is low due to the two reasons:

1. The average order placed by the customer is $25.00

2. It has a markup of 100% on all products.

This means that on an average the company makes $12.50 per sale and generates $2.50 from each customer to pay for salaries, web hosting, office space, and other general expenses.

While this is the quick and dirty calculation, what happens if customers make more than one purchase over their lifetime? What if they completely stop shopping at brick and mortar grocery stores and buy from only this company?

To resolve this problem you can take the help of (CLV) customer lifetime value which is specially designed for this purpose.

CLV metrics gives you a more accurate understanding of what the customer acquisition cost means to your company.

After understanding this, let us move on to the second example of online CRM Software Company which has a good metric.

This company provides a cloud-based online system to its customer for managing sales contact for customer relationship management. Due to cloud-based software, the company has a low cost of disturbing the software.

Moreover, it is able to easily retain customers because of the pain customers would experience uploading all the contacts, tasks, and events they are tracking a new CRM software.

The company has also worked its way up the search engines, they also has an expert sales support team working for minimum wages.

In addition to this, they also has many strategic partnerships which provide a steady supply of customers. In fact, they spend only $2.00 acquiring a new customer with a lifetime value of $2,000.

You don’t believe me look here is the calculation:

  1. Total cost of new customer sales supports call centers: $1,000,000/year
  2. Cost paid to strategic alliance partners per customer: $1.00
  3. Total monthly spending on search engine optimization: $20,000/year

Total new customers generated in the year: 1,020,000

Customer acquisition cost: ($1,020,000 / 1,020,000 customers) + $1.00 per customer = $2.00

As in our previous example, the amount is worth only the money extracted from customers. This company has used a customer retention calculation to determine that its customer lifetime value (CLV) is $2,000. That means this particular company is able to turn a $2.00 investment into $2,000 of revenue! This is both attractive to investors and a signal to the marketing team that an effective system is in place.

After reading this we know that you also want to reduce CAC cost.

Here are some ways to reduce CAC cost:

Customer acquisition cost is designed to measure and maintain the profitability of your acquisition teams. If you want your business to be viable then you need to think of ways to reduce the customer acquisition cost and increase the customer lifetime value.

The best rule of thumb is to be spending 33% or less of your customer’s lifetime value.

With that being said let’s put this knowledge into action today. Here are some ways you can reduce your CAC and optimize for profit.

Product design.

Yeah, you heard that right. Product design is primarily concerned with the relationship between the product, system and the customer who use them.

If the customer easily understands your service or product, they will self-serve and this will reduce the sales and marketing cost which will directly reduce your customer acquisition cost.

Simple the product, easy to understand and which will reduce the customer acquisition cost.

Improve your conversion.

One of the most crucial metric that all the marketers monitor is conversion.

Conversion does not always indicate a sale, it also indicates that a customer took some action that pushes them a bit further down to the purchase funnel.

Also read: How Slack Does Customer Retention Better Than Anyone Else

No matter how well designed your site or product is, if you are not making the conversion process easier for your customer then it will be difficult for you to get a lead or a sale.

So, find a way to increase the conversion after the signup because improved conversion will reduce the customer acquisition cost.

You can improve your conversion by setting up goals on Google analytics and perform A/B split testing with new checkout system in order to reduce shopping cart abandonment rate and improve the landing page, site speed, mobile optimization, and other factors to enhance overall site performance.

Enhance user value.

This means that we need to find some ways to satisfy our customers. It can be anything additional feature enhancements/qualities that your customer has expressed interest in.

It may be implementing something to improve the existing product for greater positioning, or developing new ways to make money from existing customers.

For instance, you may realize that customer satisfaction ratings have a positive correlation with retention rate

Strengthen the effectiveness of Sales and Marketing spend

Every SaaS business wants to close more sales and to close more sales you will need to optimize your sale and marketing expense through lean technique.

So find a channel that has proven interest and put money on it so that you aren’t wasting any more dollars.

Implement sales friendly CRM system.

“A good [sales-focused] CRM system can help your sales force stay organized and focused,” says Mack Dudayev, CEO, and co-founder,InsureChance, an online life insurance marketplace.

Implementing CRM system in your business can provide you with the feature such as lead prioritizing, automated email list, blogs, loyalty programs, and/or other techniques that capture customer loyalty.

Another benefit of CRM system is that “You can see how fast leads are being contacted, an amount of attempts made, total sales and idle time.