Only 10 to 15% of your leads turn into customers. Where does the lost 90 percent go?

Prospects go through many different steps once they come across a brand. You could have lost the 90 percent anywhere in their journey: some customers may have lost interest due to their changing needs, and others may have found your product insufficient. However, you cannot know for sure without analyzing your Customer Acquisition Funnel.

The Customer Acquisition Funnel outlines the stages that customers go through before making a purchase. The steps are summarized as Awareness, Interest, Consideration, Intent, Evaluation, and Purchase. Once you understand the funnel and the indicators, you'll also know when a customer is at a specific stage. Using this information, you can prevent 90% of your leads from leaving.

Keep reading to learn more about the stages of the customer acquisition funnel and the metrics you can use to measure customer acquisition!

‍

Customer Acquisition Funnel Stages

‍

‍

Awareness

The funnel gets narrower as you go down: not all people aware of your brand will end up as customers. In fact, only a tiny portion of those people will go to the purchasing step. So, to maximize the number of people who convert, you need to reach a large audience and increase the probability of attracting qualified leads.

To do so, you need to create awareness around your brand's name, which is the ultimate goal of marketing. The most efficient marketing techniques for SaaS are inbound marketing techniques: if used right, inbound strategies are up to ten times more fruitful than outbound ones. Some of these inbound strategies that generate awareness are:

1. Content Marketing

Being the first name to pop up on a Google search gets you one step ahead. A prospect who has never heard of your brand's reputation will likely learn about you when they read your article. They'll also remember you as a reputable and knowledgeable name in SaaS, and this awareness makes them more likely to come back later.

2. Social Media Marketing

A social media presence is as significant as a presence on search engines. You should use social media for posting infographics, short video clips, or tweets about your industry that are meant to be educative and interesting. When the right audience engages with your posts and shares them, you get your name heard by your followers and their followers.

3. Referral Marketing

Your customers' coworkers, friends, or acquaintances may also be qualified leads. While it may be hard to reach them via social media or email marketing, you can be sure that your satisfied customers will tell them about your brand. Referrals aren't only good because they generate more awareness. They're also effective because the people you reach via referral campaigns are more likely to check your products out due to their trust in the customer who made the recommendation.

‍

‍

Interest

Just knowing about your brand's name isn't enough to pique interest, and if prospects aren't interested, they won't consider buying from you. To generate interest, you have to position your brand as the solution. You can also achieve this via inbound marketing and content marketing—publishing case studies, How-To guides, and answering basic questions about your industry.

Most companies miss the opportunity to create interest because they think answering simple how-to questions is not worth the effort. However, these types of blog posts are necessary if you want to attract people who are in their research phases. For example, if a prospect searches "How to do Inbound Marketing," you shouldn't just dismiss them, thinking they're far from making a purchase. That prospect is likely to click on your "Inbound Marketing Tools" post following your how-to post, where they'll also see your tool's description.

‍

Consideration

Once a prospect is aware of the possible solutions to their problem, they'll start considering a wide range of options. If they've moved down your acquisition funnel, your brand will be one of them; however, there's no guarantee that it will be their first choice. For instance, if your brand is focused on user onboarding, they'll be considering buying any one of the onboarding tools they've become aware of. At this stage, they are inclined towards making a purchase, but they're still educating themselves.

To attract prospects at this stage, you should publish comparison posts with your competitors: posts that compare them and your brand. Helping your prospect decide (even if it doesn't end in your favor!) will make them remember you later on.

‍

Intent

Your prospect is showing signs that they may purchase your products, which is called "buyer intent." Some signs of intent are:

• Frequent visits to your web pages,
• High engagement with emails, campaigns, and CTAs,
• Engagement with specific articles or social media posts,
• Downloads,

And more, depending on your company. When you know the signs of buyer intent, you should use the data. Focus on leads showing buyer intent so that your marketing team is not wasting its time and effort on leads that won't end up converting.

‍

Evaluation

This is when your product is in the spotlight: the lead may have signed up for a free trial or tried your demo by now. They are actively weighing the pros and cons, and these include your product and your customer service and effort. Even if your prices are a con for the prospect, good service may cover up for you: 68% of people say that they will pay extra for a product with efficient customer service.

‍

Purchase

This is the final stage that every SaaS company ultimately wants to reach in the funnel. Unfortunately, only 25% of leads are ready to move to this stage in your funnel: the rest have to be convinced. Also, while this stage may be the last in the customer acquisition funnel, it's not the final step in the SaaS Marketing Funnel. You still have to retain the acquired customers and turn them into advocates of your brand.

‍

Customer Acquisition Metrics For SaaS

Now that you know the stages your customers go through, how can you ensure that the maximum number of prospects reach the final purchasing step? How can you analyze your performance as a company at the different stages of the funnel? The answer to both of these questions is Customer Acquisition Metrics. Analyzing the data and trends in the metrics below will help you optimize your customer acquisition funnel.

‍

LTV: CAC

Unfortunately, gaining customers isn't free. To create awareness and buyer intent, you have to put a lot of money into PPC ads, marketing campaigns, marketing teams' salaries, social media, and more. Each dollar you spend on attracting and closing a deal with a customer is included in your Customer Acquisition Cost (CAC).

The tricky part is balancing your Acquisition Cost with your customers' revenue. After all, if a customer costs more than they pay to your brand, then they're not very profitable. And if all your customers cost more than they pay, your business isn't likely to stay afloat for long. To understand whether your customers are generating enough revenue, you should look at their Lifetime Value (LTV). The proportion of your LTV to your CAC measures the profitableness of your customer acquisition strategies.

If your ratio is too low, you're spending too much on acquiring customers. This could be because,

• You're not directing your marketing campaigns to the right audience. If your ads and posts aren't directed at your ideal customer profile, they may not be reaching the people with the suitable needs or budgets.
• Your customer engagement strategies are ineffective. Once leads have converted, you have to increase their engagement with your tools so that they buy more and upgrade.
• You've focused too much on lead generation and marketing that you've forgotten about customer retention.

And on the contrary, if your ratio is too high, it could be because,

• You have a high sales and marketing ROI. Good job!
• If it's much higher than, say, 3:1, then you may not be spending enough and playing it too safe.
• ‍

‍

‍

Especially in the Evaluation stage, customers will be looking for reasons to pay for your products. If they can't find a critical feature that would've led them to their 'aha!' moment, they'll leave the funnel before the purchasing stage. And existing customers who've missed their aha moment will be unlikely to pay for their subscriptions the following month.

Your Activation Rate measures the rate of people that reach their 'aha' moment by performing a critical action that you define. This action could be using a key feature for the first time or repeatedly, spending time with the product, etc. By looking at the number of people that have completed the critical action in a specific time frame, you'll get your activation rate.

A low activation rate may mean a couple of things. The problem may be with your onboarding process, where you're failing to guide customers towards the right features. Or, the problem may be similar to a low LTV to CAC ratio: you may have targeted the wrong audience, and your product may not answer their needs. You can solve these problems once you detect a low Activation Rate.

‍

Free Trial Conversion Rate

This is another one of the essential metrics in the Evaluation stage. Unlike the Activation Rate, the Free Trial Conversion Rate is less adaptable. As its name suggests, it simply gives you the number of prospects that have moved to a paid plan.

Other than this difference, the Free Trial Conversion Rate essentially answers the same question as the Activation Rate: have prospects seen the value in your product? A high rate means yes, and a low rate means that many customers leave your acquisition funnel without realizing they need your product.

‍

NPS

I've stated the importance of referral marketing above. To generate more awareness around your brand's name and products, you need active supporters. These supporters will be satisfied customers, and your NPS score looks at the number of these satisfied customers. An NPS survey asks your customers, "On a scale of 1 to 10, how likely is it that you'd recommend us to a friend or colleague?" Then, the results are separated into three groups:

1. Detractors: those who score between 1 to 6. These unhappy customers are likely to damage your reputation by stating their dissatisfaction.
2. Passives: those who score 7 and 8. While these customers are unlikely to make negative comments, they're also unlikely to advertise your products to others. These customers are also open to offers from your competitors.
3. Promoters: Those who score higher than 8. These are the supporters that advertise your brand for free. They are also the customers that stay loyal to your company, ones with high CLVs.

Your NPS score is the difference between the rate of Promoters and Detractors. Your goal should be to win back the detractors, turn the passives into promoters and secure their loyalty, and reap the benefits of promoters' referrals.

Expansion Rate

Demand generation doesn't end once a lead has converted. Your products can generate more value for customers as time goes on, and as customers realize the increasing value, they may (and hopefully will) upgrade, buy add-ons, and create more revenue. The additional revenue generated from these upsells, upgrades, and cross-sells is used to calculate your Expansion MRR. MRR should sound familiar as it's a common and vital revenue metric, and expansion MRR is one of its derivatives. It tells you whether or not you're catering to existing customers.

By working on your Expansion Rate, you don't only increase your recurring revenue but also indirectly improve your LTV: CAC. An increasing Expansion MRR means increasing demand from current customers, which leads to an increase in LTV. It's essential to look at Expansion MRR separately rather than only looking at net MRR since the net MRR looks at both new and existing customers. In contrast, the Expansion MRR focuses on existing customers' satisfaction.

‍

How To Measure Customer Acquisition Cost?

The first thing you need to do is determine the period you're calculating the cost for. If you're analyzing the CAC of a month, then gather the data from that month. You'll need to know the money spent on marketing and sales in that month and divide it by the number of new customers. As I've stated before, under the definition of LTV: CAC, there are many costs that you should consider while calculating your marketing and sales spending. These include,

• Product Management: the money you spend on optimizing your products is also included in customer acquisition. After all, you're bettering your products to appeal to them more.
• Ad Spend: the money that goes into your PPC and social media ads, or any other ad, is included.
• Salaries: each employee's wages in your marketing and sales team should be included in your calculations since they're also paid to attract customers.
• Technical Spend: this is not the money you spend on technical issues with your products. It's the money you spend on analytics tools for your marketing or products.
• Production Costs: the money you spend on creating videos, infographics, and so on also goes into your acquisition cost.

You can repeat this process and use annual numbers to find yearly costs.

While it's easy to calculate CAC, it may not be so easy to interpret and improve it. Once you've calculated your CAC, you need to know the CAC benchmark for your industry to know how you're comparing. For SaaS, the average CAC is around $205.

‍

Conclusion

Managing costs isn't only a financial burden; it's also an indispensable part of marketing and sales optimization. Thus, pouring all of your money into acquiring new leads and customers indicates poor financial management and marketing efficiency. However, it's never too late to fix things: you can pinpoint the problem using the acquisition metrics above. This means locating the funnel stage that your business is struggling with and finding out the underlying cause. Once you've identified the problem, solving it is easy.

Since it's an important indicator of sales, marketing, and financial health, Customer Acquisition is one of the first metrics you should master.

‍

FAQ

What is a good CAC for SaaS?

For SaaS, the average CAC is around $205. Any CAC close to that number is acceptable.

What is lower-funnel marketing?

The people at the lower parts of your funnel are close to converting. Low-funnel marketing is thus about catering to prospects' needs in their intent or evaluation stage.  

Why tracking CAC is important?

Tracking CAC is important because it's an essential indicator of sales, marketing, and financial health.

‍