Average Customer Acquisition Cost (CAC) By Industry
Customer Acquisition Cost (CAC) is an extremely important metric that B2B and SaaS businesses must use to understand how much they have to spend for each to get each paying customer onboard. It’s important to take a good look at this metric because
In this article, I will talk about what customer acquisition cost is, how to calculate it and how to optimize it for SaaS companies. So, if you’re looking to reduce the cost of acquisition and increase the number of customers you get per year, this article is for you.
What Is Customer Acquisition Cost?
Customer Acquisition Cost often referred to as CAC, refers to the average total cost while gaining a new customer. This metric is vital for calculating how well your business is doing, and it is crucial when you calculate your user activation rate.
Ideally, you should want your Customer Acquisition Cost to be as low as possible; however, there is a multitude of factors, as I will explain below, that affect your customer acquisition cost. These include brand awareness and the style of marketing you use.
Your customer acquisition cost should lay at the center of your marketing strategy, and you should make decisions according to this metric. Without calculating your customer acquisition cost, you won’t be able to make even short-term plans for your product. So, it is really important for you to thoroughly understand what is being talked about.
Terms You Need to Know:
Before getting to calculating your customer acquisition cost, let’s talk about some basic terms that are related to the Customer Acquisition Cost and its calculation. These are the basics you need to grasp before understanding how your CAC affects your overall business.
1. Target Audience
The term target audience refers to the group of people you want to appeal to. This means all the people that see your advertisements, product reviews, and other products. You want the number of people in your target audience to be high, however, it’s also important to analyze and segment your target audience for your advertisement campaigns to be more effective.
2. Lifetime Value
Lifetime value (LTV) or sometimes referred to as Customer Lifetime Value (CLTV), is the total amount of income a customer generates for you during the entirety of your business relationship. The lifetime value of a customer is important when you are trying to decide whether you want to retain your existing customers by reducing your churn rate or focus more on acquiring new customers.
Here is how you can calculate your Lifetime Value:
- Calculate your ARPU by using a tool like HockeyStack.
- Decide whether you want to use Revenue or Customer Churn.
- Divide your ARPU by your Revenue or Customer Churn.
3. Customer Churn Rate
Customer Churn Rate refers to the number of people that sign up for your product and leave for any given reason. These people are basically your lost investment. You should want your customer churn rate to be as low as possible. Ideally, you should strive to have a negative churn rate.
4. User Retention Rate
The user retention rate is the opposite of the customer churn rate. It represents the rate of people that utilize the services you provide for a certain period and proceed to use it for a number of months or years. Just like you should want your customer churn rate to be as low as possible, you should want your user retention rate to be as high as possible.
How To Calculate Customer Acquisition Cost?
Calculating your customer acquisition cost is a pretty straightforward process. All you need to do is to divide the total cost of sales by the number of customers you have acquired. This calculation allows you to calculate your customer acquisition cost in any time frame you would like.
However, although it depends on what kind of services you offer to your customers, I would recommend having monthly calculations to better track your customer base. In this way, you will not over or undercalculate your customer acquisition cost.
Understanding your customer acquisition cost is important because this determines whether or not you should try to reach out to new audiences or instead retain the existing customers you have had. Customer Acquisition Cost is such a fundamental part of SaaS marketing metrics that almost all SaaS marketing software tools, including HockeyStack, calculate it.
Here are some factors that might affect your customer acquisition cost:
- The duration of your sales cycle
- Value of Purchase
- The lifespan of a Customer
- Frequency of purchases
Average Customer Acquisition Cost By Industry
As I have mentioned, your average customer acquisition depends on both the type of website you operate and the industry you operate in. In this section, I will talk about how the industry you operate in affects your customer acquisition cost.
Below you will find a list of some industries and why
- SaaS Companies usually has an average Acquisition cost 205 USD. You can consider this pricing range to be the median of overall average customer acquisition costs among the industries.
- According to the estimates, the highest average customer acquisition belongs to the education industry with 862 USD. This is is probably due to the selective nature of high education.
- According to HockeyStack’s calculations, the lowers customer acquisition cost belongs to the online marketing companies, which has been increasing its customer reach ever since the rise of COVID-19 pandemic. It costs around 87 United States Dollars.
- Financial services is among the more expensive industries when it comes to average customer acquisition costs. The average Customer Acquisition cost in this industry is 640 USD.
- Business Consulting has an average customer acquisition cost of 410 United States Dollars.
Here is a short table summarizing what I have explained so far:
|Company Type||Average Customer Acquisition Cost (In USD)|
|Online Marketing Companies||87|
Do keep in mind that these numbers are recent and often prone to change. You should do your own analyses for your own sector to figure out if you are falling behind the industry’s curve.
What is a good CAC?
Determining how good your Customer Acquisition Cost is done by calculating your LTV (Lifetime Value) and finding the ratio between the two. All you need to do is to divide your customer lifetime value by customer acquisition cost.
An average Lifetime Value to Customer Acquisition Cost ratio is often 3:1, and anything higher than this is even better. However, as I have discussed above, do keep into account how the industry you operate in affects your CAC.
In addition to taking into account the lifetime value of your customers, you can also use the earlier chart I have shared to calculate how well your CAC is. So long as you stay below the above costs, that means that your business is doing well. However, in summary, one can classify the Customer acquisition costs ratio as follows:
- 1:1 means that the cost to acquire a customer is equivalent to the revenue made through that customer
- A ratio less than 1:1 means that your customer acquisition cost is higher than the income it brings
- If you have a 3:1 ratio, this means that the customer brings more income than the company spends on attracting them.
How To Optimize CAC For SaaS Companies
Optimizing your Customer Acquisition Cost might sound hard, especially if you are a SaaS company. However, rest assured, by following some simple steps, you will easily be able to reduce your customer acquisition cost.
Here is a shortlist of the steps you can take to optimize your CAC:
1. Define Your Customer Base
Knowing your customer base and what their demands are is the most important step in optimizing your CAC. Instead of reaching broader audiences that might have no relation whatsoever with your product, you should always strive to direct your marketing efforts to a specified group. This is pretty similar to the difference between inbound and outbound marketing.
You can use a software tool like HockeyStack to gather and analyze the stats related to your customer base. HockeyStack will allow you to analyze the metrics like your user activation rate and LTV.
Churn surveys are also a great way to determine the expectations of your customer base. These surveys will not only allow you to track the stronger and weaker sides of your product but will also enable you to get written feedback on your product from your customers.
2. Optimize Your Sales Funnel
Optimizing your sales funnel is also an important step in lowering your Customer Acquisition Cost. This is relatively easier compared to the other methods mentioned in this section since you basically have total control over your sales funnel.
Using sales analytics tools like Hockeystack, you can gain greater insight into your sales processes and understand which stages of your sales funnel are the most successful. With this information, it’ll be easier for you to know what stages you need to optimize for best results.
3. Try Something New
There are a lot of variations between sectors and websites in any given sector. You should always strive to make changes in your website and marketing strategies to attract more customers for less price.
You can also use changes in your marketing strategy, try out changes in your SaaS marketing plan and utilize new advertisement techniques (such as subliminal advertising) to optimize your customer acquisition cost for your business.
Conducting A/B testing is a great way to figure out what your customer base wants without spending extra effort and resources for testing. This method will also enable you to try out two different methods simultaneously as well, which saves you from a lot of trouble and wants you to take into account different marketing fluctuations for your methods.
4. Try Specialized Marketing
In addition to figuring out who would be inclined to try out your product, as mentioned in point one, you should also try out different ways to reach different user segments for your product. By taking into account what makes them have their “Aha moment,” you will be able to increase the efficiency with you conduct your marketing.
Segmenting your users, determining what their priorities are, classifying them according to how important these groups and their priorities are to you is a great way to consider which sort of marketing strategies you should follow.
For example, if one of your vital groups’ main problems is how efficient your product is, you could try to reach them by providing ratings of your product and user reviews. On the other hand, if one of your main groups is concerned about your pricing, you can inform them of the discounts you offer.
5. Implement a Customer Referral Program
One of the most important ways to increase your advertisement’s reach is to employ a customer referral program. Many software companies like Dropbox, FreeAgent, and Google provide their customers with referral programs for them to enjoy.
If conducted properly, referral programs allow you to have reach for virtually free. Not only do referral programs help you with your advertisement reach, but they will also enable you to create brand awareness and loyalty for your company.
6. Check out examples in your industry
One of the most important things you could do to improve your marketing strategy is to check out other examples in your sector. Although general examples can be given regarding the general aspects of SaaS marketing, every industry has its little tactics that you can employ.
You can learn about these tactics either by gaining the experience first-hand or simply checking out what most businesses in your sector do. While the former can allow you to be innovative, the latter will help you the most if you are a newcomer in the industry and need to catch up.
7. Keep Track of Your Metrics
In addition to checking out other examples and doing A/B testing, you should also keep track of your website’s and advertisements metrics. In this way, you will be able to not only learn what works and what doesn’t but will be able to predict the changes in the pattern of your industry. Tools like HockeyStack enable you to keep a constant track of metrics without any need for such a thing. Hockeystack not only stores your metrics but also allows you to make comparisons without much effort.
In this text, I have analyzed different aspects of the customer acquisition cost, what is a good customer acquisition cost and how to optimize it for your SaaS business. Understanding your marketing and sales funnels and knowing what yields results is the best way to reduce costs across the board, allowing you to increase revenue and expand exponentially.
CAC measures the cost to acquire an individual customer while CPA, cost per acquisition, measures the cost to acquire something like registration and user activation.
A good Lifetime Value to Customer Acquisition cost ratio is usually 3 to 1. However, this changes according to the sector you operate in.
There are many tools that you can utilize to reduce your customer acquisition cost; however, I would recommend trying out HockeyStack since it provides its users with a multitude of features.
You can check out examples in your sector, try A/B testing, and reach out to experts in HockeyStack. However, do not forget that no matter what happens, it will take time before you see solid results.