How to Determine “Cost of Acquisition” of your SaaS Business?

A SaaS business relies and depends upon its customers majorly. When it comes to the initial phase of setting up your business, your inclination must be to acquire more and more new customers by all means possible.

There is one thing although which is often undermined – “Cost of acquisition” which can add up a lot to your total costs in the long run.

There is something called “customer lifetime value” which we will discuss in the later part of this article. If you measure your cost of acquisition against customer lifetime value, you will most probably discover that the revenue earned from each customer is much lesser than estimated.

Since budgeting for sales and marketing trickier than it appears, we would like to break it down for you. Let’s take a look at how to determine your SaaS business’ cost of acquisition.

Customer Acquisition Cost – What is it? What does it consist of?

Customer Acquisition Cost refers to all those costs incurred in sales and marketing with the intention to acquire new customers for your SaaS business. The goal definitely is to spend the least on each customer. On the other hand, acquisition costs may vary on the basis of nature of business, niche, and type of customers.

Customer-acquisition cost is a very significant metric to help you determine if you own a viable business model that is scalable in the long term. The higher your earnings are after expenses, the better.

Now, there is something called Customer lifetime value which plays a very important role in measuring the performance or effectiveness of your customer acquisition process. You need to reconcile your acquisition cost against your customer lifetime value so that you get an idea whether your costs are high, low or at par. Customer lifetime value should be given priority and monitored more closely.

What Is customer lifetime value?

How much revenue do you earn from each(single) customer while he/she is paying for your services? When you average out that figure across your customer database, the result will be your customer lifetime value. It’s always wise to target a higher number. Now, that indicates the longer a customer stays and pays for your services, the more valuable that person is to your business.

There isn’t always a number to hit, because customer lifetime value can vary a lot from one SaaS business to another. In general, though, your client acquisition prices ought to be at or but thirty-three p.c of your client lifespan worth. If you aren’t there yet, don’t buckle, because the scale can be titled in your favor.

Customer-lifetime value and customer-acquisition cost ratio

When you’re trying to higher perceive your business’ value of the acquisition, there are many important SaaS metrics to understand. It should be apparent that it’s better to spend less and earn more, as opposed to the other way around. This can also help you determine your ROI — the overall efficacy of your marketing strategy. Ideally, your client lifespan worth and customer-acquisition value quantitative relation ought to be 3 or higher. Fortunately, neither value is fixed. Think of it like a seesaw. You can cut back prices and generate additional revenue, but those efforts will require ongoing optimization.

This quantitative relation alone will provide you with a higher plan of your business’ value of the acquisition, however their square measure another vital factor to stay in mind, like churn.

What is churn?

In practically every business, customers come and go. This is called churn. Even a five p.c distinction in annual churn between 2 businesses may well be vital, especially over the course of five, 10 or 15 years.

If you’re ready to keep customers for extended, you can consistently increase revenues without having to generate more business. Churn drives up client acquisition value and takes a toll on client time period worth. A high churn rate may be a possible indicator that your service is mismatched to your customer’s desires, and may require further development. Adding options or tweaking the code may more approach the prices.

Most little SaaS businesses tend to possess a monthly churn rate between one and eleven p.c.

As with alternative metrics already mentioned, the exact nature of the business and the customers you’re targeting are factors here. There is no perfect score. The lower the churn rate, the better, but smaller businesses typically have a higher churn rate, so don’t be put off by that.

It can be improved upon.

Calculation of  your SaaS business cost of acquisition(COA)

A simple thanks to calculating your client acquisition value is by dividing the full value of sales and selling by the number of consumers you non-inheritable.

Let’s say, for example, that you spent $10,000 to acquire 350 customers.

That would build the price of acquisition roughly $28.57 per customer.

Customer-lifetime worth is additionally straightforward to calculate. You’d merely add up the revenue earned from every inactive client and divide it by the full variety of consumers.

As previously mentioned, if your customer-lifetime value and customer acquisition cost ratio are higher than or equal to three, you know that you have a viable business model on your hands.

You would still have to be compelled to account for churn, because, as we already determined, a higher churn rate would be indicative of a problem with the product.

It might be a twin together with your audience members; it’d not supply the correct options or edges they want, or the answer itself may not be what they were trying to find, and there are better options on the market.

Don’t forget: the value of the acquisition is sort of a seesaw and might be optimized.

Takeaways

In developing your online and offline presence, you need to realize that customer awareness is key. You have to take your leads and prospects from completely unaware to most aware of your marketing and sales to be effective. The added benefit to reducing customer-acquisition cost and increasing customer lifetime value is that it can help your valuation. If you’re interested in selling your business at some point, you will need to take a close look at acquisition cost and lifetime value. You don’t need to optimize it to the nth degree to pique the interest of investors, but going through the process will be beneficial for you as well.

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