What is the worst enemy of your software as a service (SaaS) distribution model? Is it that nefarious competitor of yours? The tanking stock market? Your brain-dead customer base? No, no and no.
Your competitor isn’t nefarious, the stock market will be fine and your customers are actually pretty intelligent. No, the worst enemy of your SaaS is a little number called CaC, or customer acquisition cost.
If you’ve never woken up in a cold sweat, trembling at the thought of your CaC, I understand. Most SaaS marketers I know aren’t too stressed about it, either. But the truth is that the cost of customer acquisition can either make or break your SaaS business. David Skok, of Matrix Parters, for example, has called the cost of customer acquisition a “startup killer.” In Skok’s informal evaluation, customer acquisition cost actually turns out to be “higher than expected, and exceeds the ability to monetize those customers.”
I agree with Skok. In my experience of founding and leading several successful SaaS businesses, I realize the massive importance of lowering your CaC in order to attain profitability. So, now, let’s answer the question, How do you lower your customer acquisition cost?
1. Raise your expectations.
To nip the CaC killer question in the bud, let me set forth some folksy advice: Raise your expectations as to how much CaC will cost you.
Often, a business is doomed to fail because the CaC estimate is far too low. When the rubber meets the road, however, marketers are shocked that their CaC metric has been set three or four times lower than reality. So, the point is that when you do roll up your sleeves and dig into your business plan and marketing efforts, you should estimate your CaC high.
How do you calculate your CaC? The formula is simple: acquisition cost divided by new customers within a time period.
- To calculate acquisition cost, tally up sales and marketing cost (including overhead expenses, like employees).
- Consider that calculation within a given period (e.g., one month).
- Divide the resulting number by the number of customers you obtained during that period.
Thus, for example, if you spent $10,000 on acquisition during month one, and obtained 1,000 new customers, your CaC is $10. Here is an example of CaC calculation:
Of course you're probably asking, "During the development stage, when I haven’t done any selling or acquired customers, how do I perform these calculations?"
The answer is, you’ll have to estimate. An accurate estimate requires you to know your possible acquisition channel options, recognize time delays (which can really throw off your CaC) and reconfigure your numbers based on real-world experience.
Because of the potential challenges, I recommend making a rough estimate, then doubling it or tripling it for some wiggle room, as you engage in business planning and marketing projections. Next, let’s try to lower this number, shall we?
2. Hone your buyer profiles.
Marketing is a waste of time unless you know exactly whom you’re targeting.
Decide this critical fact as soon as possible. Create a buyer persona that typifies your target. Once you’ve done this, shape all your marketing efforts around this persona.
Doing so virtually guarantees that you won’t waste your resources chasing acquisition channels that don’t pan out.
3. Sharpen your USP.
If you go to market without a USP, then your product will be undifferentiated and unmotivating to potential buyers. What is a USP? It stands for unique selling proposition/point. Your USP is the single reason why and how your product is better than the competition's.
So, you need to state your USP clearly, broadcast this information throughout your branding and elevate it in front of potential customers.
USP is the reason your customers buy from you to begin with. Once you're focused on it, your CaC will virtually take care of itself -- gradually decreasing as your USP is sharpened.
4. Create content focused on long-tail keywords.
In general, one of your greatest marketing channels is content marketing. Within the wide world of content marketing, however, there is one particular method that will be attractive to your potential customers, and consistently valuable without any added cost: organic traffic. Your potential customers are searching for you using long-tail keywords, meaning the longer, more specific keyword phrases viewers are likely to use when they're closer to a purchase.
To use long-tail SEO strategy, you simply need to produce ontent, and integrate long-tail keywords. Your target audience will find this content and convert on your product.
5. Use retargeting.
The cost of acquiring a new customer is always higher than the cost of upselling an existing one. When you don’t have any existing customers, how do you use this information to your advantage? It’s called retargeting.
When a potential customer visits your website, but doesn’t complete a purchase, you want to continue communicating with that potential customer, using retargeting. In some tests, marketers were able to gain retargeted customers, at an acquisition cost of less than $1.
Retargeting can quickly earn back thousands of potential customers at a far lower cost than you thought possible.
6. Employ relentless testing.
It will be very hard to reduce your CaC over the long term unless you’re doing some form of testing. I recommend constantly testing and retesting your landing pages, homepage and marketing funnel to see how you can improve these items.
The solution to lowering your CaC isn’t simply to change things. Instead, you need to test the changes to see what is truly working.
Relentless split testing is guaranteed to lower your CaC.
A lower CaC leads to a greater revenue and profitability. For your SaaS startup to succeed, you'll need to know how to lower your CaC.
And, a word of warning: Don’t expect enormous results in the beginning. As you progress, however, your costs will begin to decrease, and you’ll get the results you’re looking for.
What methods have you used to lower your Cac?