How good is your average customer acquisition cost? That is a question that all SaaS companies should be asking. Even if you acquire more customers than you dream of, your CAC, otherwise known as cost per acquisition, could be so high that it's bleeding your company. 

So let's break down the basics of customer acquisition costs, explain why they matter, and go over actionable tips to lower them. We’ll also explore how optimizing your onboarding flow with tools like Userflow can play a key role in managing your average customer acquisition costs effectively.

What is Average Customer Acquisition Cost (CAC)?

First, let's cover the basics. Customer acquisition cost (CAC) measures how much it costs you to acquire a new customer. This cost includes everything from expenses related to marketing campaigns and sales efforts to the resources used in onboarding new users. Essentially, CAC is the total investment your company makes to turn a prospect into a paying customer.

In the SaaS industry, understanding customer acquisition costs is more than just a business metric—it’s a key indicator of how efficiently you can grow your customer base. Low average CAC means you can maximize your revenue and scale your business effectively. High average CAC means your costs are eating far too much into your total revenue, making your growth unsustainable. 

Key Components of Customer Acquisition Costs:

• Marketing Spend: All expenses related to your marketing strategies, including digital advertising, content marketing, email marketing, social media promotions, and more.
• Sales Costs: The total cost of your sales activities. This includes the salaries of your sales team, commissions, and any tools used to support your sales team.
• Onboarding Costs: The resources used to onboard new customers, such as onboarding software, customer support, and training materials.

Why Customer Acquisition Costs Matter for SaaS Companies

Customer acquisition costs are crucial because they directly affect your company’s profitability and growth potential. If your CAC is too high, it means you’re spending more to acquire customers than you’re likely to earn from them over time. This is obviously bad for business.

Understanding your average customer acquisition costs helps you make informed decisions about where to allocate your marketing budget, which marketing channels to focus on, and how to optimize your onboarding process. Here are some reasons why CAC is especially important for SaaS companies:

• Measures Sales & Marketing Efficiency: Customer acquisition costs show how efficiently your marketing and sales efforts are converting prospects into customers. A lower CAC indicates that your strategies are working well, while a higher CAC signals a need for improvement.
• Impacts Profitability: If your CAC is higher than your revenue per customer, your company will struggle to make a profit. Balancing CAC with Customer Lifetime Value (LTV) is essential for ensuring that your customer acquisition efforts are sustainable. A healthy LTV/CAC ratio indicates that you’re getting good returns on your spend.
• Guides Budget Allocation: Knowing your CAC helps you decide how much to spend on different marketing channels, allowing you to focus on the ones that bring in high-quality leads at the lowest cost.
• Affects Customer Retention: High customer acquisition costs can lead to pressure to acquire as many customers as possible, sometimes at the expense of retention. A strong onboarding process that reduces churn helps maintain a healthy CAC-to-LTV ratio.

How to Calculate Your Average Customer Acquisition Costs

Calculating CAC is straightforward. The basic customer acquisition cost formula is:

CAC = Total Sales and Marketing Expenses / Number of New Customers Acquired. ​

Let’s break down what goes into this calculation:

• Total Sales and Marketing Expenses: This includes all expenses related to marketing campaigns, sales efforts, and onboarding costs. Be sure to account for advertising spend, team salaries, onboarding software costs, and any other related expenses.
• Number of New Customers Acquired: The total number of new customers gained during the period you’re analyzing.

Example Calculation for Customer Acquisition Cost:

Imagine your SaaS company spent $150,000 on marketing campaigns, sales efforts, and onboarding software over a quarter, and you acquired 600 new customers. Using the cost formula, your CAC would be:

CAC = 150,000 / 600  = $250

Common Mistakes in Calculating Customer Acquisition Costs:

While CAC has a simple formula, there are some nuances. Here are a few things to watch out for when calculating the CAC. 

1. Not Including Onboarding Costs

While sales and marketing are crucial for acquiring customers, onboarding plays an equally important role in getting customers to successfully adopt the product. In fact, sales and marketing may just get prospects through the door, but it's onboarding that actually convinces those people to put out their credit card. Onboarding costs can include a range of activities and resources, such as salaries for those developing the onboarding guides and materials.

For instance, if your company spends $100,000 on onboarding resources in a quarter and acquires 200 new customers in that period, that’s an additional $500 per customer that should be added to the CAC. Ignoring these costs can lead to the misconception that customer acquisition is more cost-efficient than it truly is. Including onboarding expenses provides a more accurate picture and ensures that the full customer journey—from acquisition to product adoption—is taken into account.

2. Ignoring Churn Impact

Churn is a critical factor that is often overlooked when calculating CAC. High churn can negate the value of even the most cost-effective acquisition efforts, leading to a lower Customer Lifetime Value (CLV) and a poor LTV/CAC ratio.

For example, if your CAC is $1,000 but your average customer churns after just three months, the revenue generated from that customer might not even cover the acquisition cost, let alone lead to profitability. This scenario indicates that the acquisition strategy is unsustainable in the long run. If you have high CAC but need to constantly replace lost customers due to high churn, you're not doing it right. 

3. Not Segmenting by Customer Type

When calculating the CAC, people often treat their customer base as all the same, but this is a mistake. For instance, acquiring an enterprise customer may require more extensive resources, such as dedicated sales teams, longer sales cycles, and personalized onboarding experiences, compared to acquiring an SMB (Small to Medium Business) customer, who might be more responsive to email marketing and self-serve onboarding, therefore taking less investment and having shorter sales cycles.

Even taking into account the LTV/CAC ratio, some customers just may not be profitable in the long run. By seeing which customers have lower CAC, you can adjust your target audience and boost your total cost effectiveness. 

4. Failing to Account for Discounts and Promotions

Discounts and promotions are powerful marketing strategies for attracting new customers, but they come with a cost. When businesses offer incentives like a 20% discount, a free month, or a reduced rate for early sign-ups, this affects your margins. Failing to factor these into the CAC leads to an inaccurate picture of how much is truly being spent to acquire a customer.

5. Overlooking One-Time Costs

One-time costs, such as those incurred during a major product launch, a rebranding campaign, or a large-scale SaaS industry event, are often overlooked in CAC calculations. While these expenses can significantly increase acquisition costs over a short period, ignoring them will mislead you on your cost per acquisition, leading you to falsely believe that customer acquisition was cheaper than it really was.

How to know if your average CAC is too high 

So how do you know if your average Customer Acquisition Cost (CAC) is too high? Here are some indicators that your CAC may be too high:

1. Unfavorable Customer Lifetime Value / Customer Acquisition Cost Ratio

The LTV/CAC ratio is calculated by dividing the Customer Lifetime Value (LTV) by the Customer Acquisition Cost (CAC). The ratio measures the return on investment (ROI) of acquiring new customers. A higher ratio indicates that your customers are generating more revenue over their lifetime compared to the cost of acquiring them, while a lower ratio suggests that the cost of acquiring customers may be too high relative to their lifetime value.

For example, if your Customer Lifetime Value (LTV) to CAC ratio is lower than 3:1, it suggests that you're spending too much on acquiring customers relative to the revenue they generate over their lifetime. Ideally, for every $1 spent on acquiring a customer, you should earn at least $3 in return.

2. Negative or Low Profit Margins

High CAC can lead to razor thin or even negative profit margins, especially if your product pricing doesn’t compensate for the high acquisition costs. If your profits are consistently low or negative, it may be a sign that your CAC is too high. 

3. Long Payback Period

The payback period is the time it takes to recoup the CAC from the revenue generated by the customer. A high CAC often results in a longer payback period, which can strain cash flow. If your payback period is way longer than the industry average, you might need to lower your CAC to improve cash flow.

4. Not Meeting Industry Benchmarks

Compare your CAC to industry benchmarks. If your CAC is significantly higher than the average for your industry or similar-sized companies, it’s likely too high. This also depends on your target audience. For instance, even within the SaaS industry, CAC may differ significantly if you're going for enterprise firms as opposed to smaller ecommerce businesses. 

5. Difficulty Scaling

If expanding on your marketing strategies and increasing your advertising spend doesn’t result in a proportional increase in customer acquisition, it could mean your CAC is too high. This usually indicates diminishing returns on your sales and marketing spend.  

8 Strategies to Lower Your Average Customer Acquisition Cost

Lowering your Customer Acquisition Cost (CAC) is a vital step in improving overall profitability and driving sustainable growth. Here are some actionable tactics to help lower your CAC:

1. Optimize Marketing Spend

Marketing is often one of the largest contributors to CAC, so optimizing your spend is crucial. Start by identifying the marketing channels that generate the most cost-effective leads. Use analytics to track the performance of each channel, such as paid search, social media, and content marketing, and allocate more budget to those that yield the best results. Continuously testing and refining your campaigns will help ensure that you’re maximizing return on investment (ROI) and not wasting resources on ineffective channels.

2. Improve User Onboarding

A poor onboarding experience can lead to early drop-offs, increasing your CAC as you’re effectively paying for customers who don’t stick around. Incorporate in-app messages, tooltips, and checklists to provide contextual help and highlight key features during onboarding.  This helps new customers achieve their goals faster, leading to higher adoption rates, improved retention, and ultimately, lower customer acquisition costs. Plus, it also improves customer retention. 

3. Enhance Targeting and Segmentation

Reaching the right target audience is essential for lowering your CAC. Use customer data to segment your audience based on factors such as demographics, behavior, or pain points. Tailor your marketing messages to address the specific needs of each segment, and use personalized content to engage them effectively. This approach not only improves conversion rates but also reduces wasted advertising spend on audiences that are less likely to be interested in your product.

4. Leverage Referrals and Word-of-Mouth

People are social creatures and validation from others is an effective way for anything to go viral. Word-of-mouth and referral programs can capitalize on your existing customer base to drive new acquisitions without significant sales & marketing spend, while also bringing in higher-quality leads, which significantly lowers the CAC. 

5. Automate and Scale Personalized Outreach

Automate your marketing strategies at scale. For example, automated email campaigns can nurture leads at scale, delivering personalized content based on user behavior and preferences. This delivers relevant information to your target audience without requiring a lot of manual effort from your team, which in turn reduces costs. 

6. Improve Product-Led Growth Strategies

Use your product as the main driver of your sales process. A freemium model or free trials can attract a large number of users at a low cost. Once they are using the product, targeted in-app messaging and personalized onboarding can convert them into paying customers. This approach lowers marketing and sales costs, but also boosts your LTV/CAC. 

7. Analyze and Adjust Pricing Models

Sometimes, your product is simply too expensive, resulting in high CAC. So experiment with your pricing strategies. This may involve introducing new pricing tiers, bundling features, or offering more flexible payment options. A well-optimized pricing model can attract more customers at a lower cost, improving your overall acquisition efficiency.

8. Optimize Paid Advertising Campaigns

Paid advertising can cause sky-high CAC if not managed carefully. Regularly review your ad performance to ensure you’re targeting the right audience and using the most effective keywords and ad placements. Consider using retargeting campaigns to reach users who have shown interest but haven’t converted yet. Optimizing your paid advertising campaigns helps ensure that you’re getting the best possible return on your advertising investment.

Lower Your Average Customer Acquisition Cost Today

Now, you know everything about average customer acquisition costs, and how high CAC can strain your resources. By focusing on effective onboarding, optimizing marketing strategies, and refining your sales process, you can drive down these costs.

We also want to reiterate how important onboarding is to achieving a profitable CAC. The sales process does not end once a customer is through the door. Convincing the customer for paid conversion, as well as retaining them for the long run is arguably more important than just trying to optimize your sales and marketing. 

Ready to see how effective onboarding can lower your customer acquisition costs? Explore Userflow’s onboarding solutions and discover how you can create seamless user experiences that drive growth. Sign up for a free trial today and start optimizing your customer acquisition strategy.