CAC Payback
The COVID-19 pandemic shifted marketing dollars online, where customer acquisition costs (CAC) are soaring. While tactics like A/B testing, look alike audiences, and optimizing landing pages may improve CAC, also consider the longer-term impact of re-assessing and aligning your marketing with your ideal customer profile (ICP).
Acquisition doesn’t equal growth
Serial entrepreneur turned VC, David Skok believes Customer Acquisition Cost (CAC) is the second biggest cause of startup failure. “The cost of acquiring customers turns out to be higher than expected, and exceeds the ability to monetize those customers.” New methods of acquiring customers, such as highly targeted Account Based Marketing (ABM), have become more economically viable as online advertising costs skyrocket. But acquiring customers is only part of the equation. Sales and marketing efficiency should reflect a company's potential to sustain its revenue growth and margin expansion over time.
What’s your CAC payback?
Your CAC payback period is how much time, in terms of subscription dollars and gross margins, it takes to payback the cost of acquiring a new customer. This metric often goes by “Time to Recover CAC” or “Months to Recover CAC.”
“CAC payback period determines how much cash the company needs to grow.” -Tomasz Tunguz, Redpoint Ventures
As long as your customer LTV is higher than your CAC over time, this is money well spent. Skok states that generally “LTV should be about 3 x CAC for a viable SaaS or other form of recurring revenue model. Most of the public companies like Salesforce.com, ConstantContact, etc., have multiples that are more like 5 x CAC. Aim to recover your CAC in < 12 months, otherwise your business will require too much capital to grow.”
How the pandemic impacted CAC payback
The pandemic changed buying behavior, and makes CAC recovery in <12 months more challenging. KeyBanc Capital Markets’ 2020 Private SaaS Company Survey includes data from 500 private SaaS companies from 2019 and 2020 year to date, through May 31, 2020. The four levers impacting 2020 performance were increased gross dollar churn, decreased new ARR bookings, higher acquisition costs (decreased sales efficiency) and an increased CAC payback period.
KBCM puts the CAC payback for 2019 new customers at 1.9 years, where 2019 upsell/expansion customers paid back the CAC in just .8. During the first 6 months of 2020 during Covid, new customer CAC payback spiked to 2.4 years, where payback for upsell customers was just 1.0. This shows the monetary impact of upsell and expansion on customer acquisition costs.
One to two years is a long time to recoup acquisition costs. Retaining and expanding your current customer base is a more efficient growth lever for long term success. But where should you start?
Acquiring the right customers can help
When was the last time your Marketing, Product, Sales and Customer Success teams assessed your ideal customer profile (ICP)? While it’s not a silver bullet, acquiring the right customers will help your CAC and long-term growth. Your ideal customer is a company that will gain the most value from your product or solution. They tend to have quicker sales cycles, better customer retention rates, and the highest number of evangelists for your brand.
Accurate ICPs offer better targeting, increased conversion rates
Increased conversion rates have a huge impact on increasing sales and lowering the cost of customer acquisition. Your ICP should offer a strong starting point for targeting the most receptive online audience.
Ideal customers “get” your product
If you’ve found an ideal customer for your product, chances are there will be less friction in their onboarding and use of the product. Identifying initial use cases, seeing early value and retention will not be as much of an up-hill battle.
Ideal customers are easier to upsell
Upselling existing customers is an important and underemphasized key to growth. As we saw from the KBMC study, selling to your base is more efficient than selling to new customers. If the customer can see the value of the upsell compared to his or her current subscription or purchase level, then they will understand why they need to buy.
Ideal customers are potential evangelists
Many SaaS companies track Net Promoter Score (NPS). Your NPS reflects how your product is received by your customer base and how likely they are to tell friends or colleagues about it. Each of these promoters can be a meaningful and cost-effective growth engine for referrals, case studies and references. In addition to the expense to acquire new customers, dissatisfied customers can hurt a company’s reputation by sharing negative reviews.
Check your CX
While your ideal customer may not have changed, the needs of your buyer-influencer-and end user may have as a result of the pandemic. The pandemic moved more of the sales and customer experience online. Teams may be using your software for new or different use cases. Product value may be assessed under a different lens.
A current awareness of your customer experience is critical for innovating and pivoting during the pandemic. By auditing your current customer journey in the age Covid, you may discover different sales channels, new training and enablement opportunities, or alternative pricing and packaging opportunities.
Assessing and improving upon digital touch-points along the buyer-influencer-and end user customer journeys offers an opportunity for businesses to emerge stronger in the “next normal.”
It all comes back to growth
Ultimately, growth is the metric SaaS business are judged on. The pandemic hit many SaaS businesses with increased gross dollar churn, decreased new ARR bookings, higher acquisition costs, and an increased CAC payback period.
Each of these outcomes is linked to targeting a customer who sees value in your product.
The velocity at which your CAC is recouped can confirm that you have a strong product - market fit, with growth that is sustainable.
As businesses look for competitive advantages during the pandemic, one place to start is aligning on the levers and the customers that ultimately move your business. Knowing, serving, and growing more of! - your most loyal customers is a great place to start.