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How to reduce your SAAS Customer Acquisition Cost

By April 29, 2018 No Comments

The Customer Acquisition Cost (CAC) as you know is a cardinal factor for any business setup to function therein and expand in their respective domains of interest.  For the most enterprises to operate efficiently and without any flaws, the Chief Financial Officers and the Chief Operation Officers of such business setups are always on their toes to hold the customer acquisition cost at a low rate. To understand how to reduce the SAAS Customer Acquisition Cost, let’s first focus on defining the concept of Customer Acquisition Cost respectively and how it came into operation.

  

Introduction to Customer Acquisition Cost:

The Customer Acquisition Cost is defined as the cost procured by a company for persuading the clients to buy the service or any such product rendered by the company. The price is inclusive of the final service or the product cost as well as all the cost incurred by the company right from the designing of the product or the service up to the marketing cost for promotional purposes.

How to Calculate CAC?

Calculating the Customer Acquisition Cost is a matter of ease with the right tools and information available to you. The below equation represents how to calculate the Customer Acquisition Cost:

Customer Acquisition Cost = Total Cost of Sales and Marketing/Acquired No. of Customers

What is the Importance of SAAS Customer Acquisition Cost?

The Customer Acquisition Cost (CAC) is currently known to be a silent killing factor for the businesses especially the startup firms. For the startup to efficiently expand its sales and ensure a profit maximization; it is convenient to have the sound knowledge of what SAAS Customer Acquisition is and how it plays a role in profit maximization. For attaining the target profit, it is mandatory for the enterprise to maintain its Customer Acquisition Cost (CAC) much below the Lifetime Value (LTV) of their enterprise. If this is neglected, the concerned firm may face a financial setback.

Additionally, to have a hold on the concept, SAAS Customer Acquisition Cost (CAC) plays a vital role for the entrepreneurs to analyze the marketing investment returns, the company would incur in the future. This knowledge will also assist them in keeping an eye on more channels that would maximize their marketing investment returns and in turn, will be responsible for an increase in the Company’s annual profit.

Moreover one can say that higher the SAAS Customer Acquisition Cost, the potential of the firm to survive in the competition will decrease and vice-versa.  Hence if the enterprise is willing for longevity in the market, It is must for them to manage their Customer Acquisition Cost (CAC) safely and smartly.

Some ways which the Establishment may use to combat the increasing SAAS Customer Acquisition Cost to maximize their returns and profits. They are as follows:

 

  • Customer Acquisition Cost Calculation:

 

The prior step for the effective way to tackle the increasing SAAS Customer Acquisition Cost (CAC) is to have a look at the calculations of the CAC. To calculate them, one needs to have a hold of precise and accurate information regarding total cost procured by the company in marketing the product and the total number of the acquired customers.

 

This has been explained in the above equation. To simplify it further, let’s assume a firm spends $4000 on marketing the product and it acquires 100 new customers, then the Customer Acquisition Cost for this firm turns out to be $40.

 

In order to find out what the figure corresponds to, one must have a sound understanding of the Lifetime value of the customer. Let’s say for an example, the average cost of a particular service provided by ABC firm is $60/month, with the customer subscription tenure of one year, i.e., 12 months and the number of transactions made by the client is 1.  The Lifetime Value of the Service is calculated as follows:

 

Lifetime Value = Average cost of the service provided X Number of transactions undergone X Subscription tenure (in months)

 

Then as per the above formula, then for the assumed transaction, the lifetime value may be concluded as follows:

Lifetime Value= $60 X 1 X 12 = $720

A comparative analysis of the SAAS Customer Acquisition Cost and the Lifetime Value is shown herein with the help of a pie chart.

As can be seen here the lifetime value of the customer is more than the SAAS Customer Acquisition Cost, and hence the firm is in the safer hands. Thus, one can say that the SAAS Customer Acquisition Cost and the Lifetime Value are inversely proportional to each other. More the Customer Acquisition Cost, lesser will be the Lifetime Value and vice-versa. The favorable condition for the Company’s profit maximization is when the Company has its Customer Acquisition Cost at a much lower level than the Lifetime Value of the customer.

 

  • How to Optimize the Rate of Conversion:

With a view of increasing the rate of conversion, it is a necessary factor for the business entrepreneurs to grab hold of a perfect analytics platform so as to keep an eye on the performance indicators to achieve their desired goal. In simplified terms, this includes optimizing your marketing tools such as your campaigning advertisements, website designs, etc. so that they generate a particular justification and lead the firm towards its targeted goals and desires.

 

  • Automation of the Marketing factor

Marketing automation factor is specifically designed tool which comprises of softwares for the marketing team of any enterprise in order to assist them in marketing on social platforms and ease their repetitive occurrence. This tool can be used to generate more leads till the customer is persuaded to opt for a free trial of the concerned product. This can be initiated after a client downloads an e-guidance book from your website for more information regarding your product. The enterprise, on the other hand, needs to optimize their marketing automation factors in such a way that it will start sending informative e-mails to the client’s email address explaining the details about your product. The emails should be customized in such a way that the client will be profoundly convinced to opt for the free trial of your company’s service or product.

 

  • Split- testing Principle

A/B testing or merely the split testing principle replaces our assumptions with the factual data, say, for example, it conclusively interprets that X is more significant than Y. The protocol to move ahead with the Split-testing is as follows:

  1. Collect your data pertaining what to be improvised with testing and how to proceed forward. Analyze your web page for exit pages, funnel visualization, pages meant for entry, etc. Web heatmaps aids to analyze what people are clicking on your website, the tenure for which the visitors scroll on each page of your website, etc.
  2. Assignment of Goals: Once done with the data generation, the next target would be to assign goals to the control and variance pages of your website depending on the quantity of the pages which will speed up your conversions. You need to set a priority for such pages which will work on your behalf in analyzing the click, the visit and the revenue goals procured by your site.

Identification of the goal is the most critical step of the A/B testing, and you cannot proceed ahead without setting an appropriate target.

  1. Hypothesis: The first hypothesis stands for the purpose that if the copy amount of your company’s web page is reduced, it might result in shooting the values of the sign-ups. This means that again the amount of copy and the number of sign-ups are inversely proportional to each other. More the amount levied on the copy lesser would be the number of new signups. The second hypothesis states that, if you place your pricing of the service above the text, it will help you to generate more new user sign-ups for your website.

 

  • 80/20 Rule:

Pareto Principle state that sometimes it may so happen that the firm may make 20 % profit out of 80% efforts invested to achieve the same, whereas contradictory to this, it may even occur so that the firm may generate the vice-versa, i.e., 80% profit out of the 20% efforts invested. This rule ensures that your firm made double the investment returns than what you spent in and helped in combating with the SAAS Customer .Acquisition Cost (CAC). To achieve the maximum out of this 80/20 rule, one could solely focus on those channels which offer you with a higher marketing investment return and simultaneously concentrate on those media which snatch away 80 % of your company’s earnings.

 

  • Customer Satisfaction:

The customer feedback plays a role here.  This will help you to receive both positive and negative aspects of the service provided. Notably, here the negative feedbacks account more as it is the one who will accomplish the task of an editor for your services. The negative feedback can help you edit out all the flaws of your service and upgrade your service or the product for gaining more consumer satisfaction.

 

Thus the above are some of the ways which will help you to curb with your high SAAS Customer Acquisition Cost (CAC) and will help you to strategize your business plan with low CAC: high lifetime value of the customer to maximize the business profit.

 

 

References:

  1. https://medium.com/@MatthewSpurr/8-ways-to-generate-low-customer-acquisition-cost-cac-for-saas-startups-ccce6d3f03f
  2. https://www.google.co.in/search?q=How+to+reduce+your+SAAS+Customer+Acquisition+Cost&dcr=0&source=lnms&tbm=isch&sa=X&ved=0ahUKEwiF-cLI_Z3aAhVEMo8KHY_eDIoQ_AUICigB&biw=1366&bih=639

 

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