Avoiding failure: The Cost of Customer Acquisition
When you read articles about SaaS startups and metrics, you are often told which to concentrate on now, and which to focus on later. Industry leaders will voice that churn, MRR (Monthly Recurring Revenue), and LTV (Lifetime Value) is critically important; and they are. They will also stress the importance of how to succeed as a startup, but many will not cover the most important aspect. How to avoid failure?
Aside from churn, MRR, and LTV, there is an important metric that you may not be considering: COA (cost of customer acquisition). You will also see this called CAC (Cost to Acquire Customers). No matter what you call it, this is one metric that can kill your business if you are not careful.
Let take, for example, a mistake we have made in the past. We developed an iOS app geared towards skateboarders and decided we would sell the app for a price between $1.99 – $3.99. After running ads and once Apple took 30%, we quickly realize that our cost to acquire a customer was more than we would bring in. This was an eye-opener, and we now consider such cases before building an app.
Calculating COA (cost of customer acquisition)
Do you know how much money you are spending to acquire each new customer? If not, then it is best to figure it out asap. Figuring it out is not as easy as you may think. If you do not keep excellent records, calculating COA can be downright impossible. You need to know what you are spending on sales and marketing, salaries for your employees, and headcount related expenses. Divide this total by the number of new customers for a specific period, and you’ve got your COA.
Striking a Balance
So what does an out of balance business model look like? It looks like one that is spending more to acquire a customer than it is gaining in the lifetime value of that customer. On the other hand, a well-balanced SaaS is spending far less to acquire a new customer than that customer is bringing in over his or her lifetime with the company.
As a business, you want to be well balanced. Unfortunately, if you are not paying close attention to your COA, your subscription business has a much higher chance of failure. It is a rare company that can sit back and watch customers beat a path to its door. Far more common is the necessity to spend money on PR, social marketing, SEO, direct sales, etc., to find the customers who are looking for your services.
Techniques to Use
We do not need to tell you that you want new customers. What we do need to say to you, though, is that there are ways of acquiring them that will help you keep your COA at manageable levels. Some proven techniques for the SaaS company include:
- Don’t pay for search ads. Instead, use inbound marketing to build the traffic you are looking for.
- Give something away for free. One of the best things that a SaaS company can give away is a scaled-down or lite version of their product.
- Free trials are always a good idea; just don’t make them extended. A few days is enough to give a serious customer an idea if your product is worth buying.
- The use of customers’ social networks to acquire new customers through viral growth.
- Metric utilization across all aspects of the customer acquisition process.
Lower Your COA Now
You understand that a low COA is vital to the success of your company, but how do you lower it? There are things that you can do almost immediately that will have an effect on your COA. These include:
- Make and post videos that anticipate and answer the questions potential customers will ask.
- Answer the most common sales objections that you receive.
- Shorten the length of your free trials. 30 days is too long.
- Compare your company to your competition before potential customers get a chance to.
When you fail to take steps to lower your COA, you are setting your business itself up for failure. If you didn’t want to be successful, you wouldn’t have started a SaaS, right? It only makes sense, then, to follow the tips above to lower your COA and begin turning a profit.
It all boils down to this: As a SaaS startup owner, you cannot ignore the cost of customer acquisition. Doing so will practically ensure that you are closing your doors too soon. Why? Because when you spend more to gain new customers than those customers are ultimately worth, you bleed money. It is that simple.
Spend some time now discovering exactly how much money is going toward the acquisition of new customers. Then calculate how much you have paid for just one of these new customers. If your COA beats your LTV, you’ve got some serious restructuring to do if you want to avoid failure. Don’t let your COA kill your company.