The majority of businesses are seeing a rise in marketing costs. This has affected companies in different ways. SaaS Tech companies see an increase in their CAC and their LTV/CAC is decreasing. In this article, we will break down why Customer Acquisition Efforts are yielding lower dividends, and how to fix it using Paid Ads.
SaaS (Software As A Service) refers to a software delivery model where applications are hosted and accessed over the Internet, eliminating the need for complex installations and updates. This model has gained significant traction, and the importance of SaaS tech companies cannot be overstated.
The traditional model of selling software licenses is being replaced by a subscription-based approach which SaaS companies use. This shift has opened doors to a lot of benefits. One major advantage of SaaS companies is their scalability, allowing companies to easily accommodate growing user demands without worrying about hardware limitations.
Another crucial aspect of SaaS is its cost-effectiveness. Traditional software often requires substantial upfront investments for licenses, infrastructure, and maintenance. SaaS, on the other hand, offers a pay-as-you-go model, where customers pay a regular subscription fee based on their usage.
With the SaaS model, updates and new features can be seamlessly rolled out to all subscribers, making sure everyone benefits from the latest advancements. This agility allows SaaS tech companies to stay at the forefront of the industry, delivering great user experiences and maintaining customer satisfaction.
Customer Acquisition Cost is essentially a monetary value of what it costs your company to acquire a new customer. It can be calculated by adding together your sales and marketing costs for a certain period and then dividing the total number by the number of customers from the same period.
SaaS companies generally run on the basis of a Recurring Revenue Model. Since they work on a subscription, it’s essential that the users keep using the product and paying their monthly invoices. In order for SaaS tech companies to grow, they have to keep acquiring new users.
When it comes to user acquisition for SaaS companies, the sales process tends to be very long. This is because they usually work in a B2B environment, although there are SaaS companies in B2C as well. When it comes to Business-to-Business sales, there are multiple stakeholders involved, and the process can last anywhere from 30 to 90 days, sometimes even longer.
That is why acquiring one customer for a B2B, SaaS Tech company can be quite expensive. In fact, it costs several times more than the initial subscription the user pays for the software. This means that each user will have to stay a paying customer for a certain amount of time in order for that acquisition to become profitable. This is called CAC/Payback Time, and it’s calculated by dividing CAC by the price of the plan to find out how many months the user needs to be a client in order for the acquisition to be profitable.
Since the initial acquisition itself is not profitable, now you can understand why CAC and understanding of customer acquisition are essential for a B2B Tech company.
LTV (Lifetime Value) is a metric used as a prediction of the net profit attributed to an ongoing relationship between customer and product. It is calculated with a simple formula: LTV= ARPU * 1/Churn.
ARPU- Average Revenue Per User
LTV is a prediction metric and is not set in stone. This means that it can change depending on the user's behavior.
LTV/CAC is a metric that measures the ratio between the Lifetime Value of the Customer and the Customer Acquisition Cost. This is a sign of profitability. As a benchmark, a good LTV/CAC for a SaaS company is 3-5. That means that for every 1000$ you spend on acquiring a customer, you earn 3-5x more.
We already mentioned how CAC is calculated - it takes into consideration both Sales and Marketing costs. That means that every dollar spent on Paid Ads will affect the Customer Acquisition Cost.
Now, if the Marketing team keeps spending the budget, but the SaaS company is not acquiring any new customers, the CAC will grow. This will negatively affect the company as the user will need to stay a customer for a longer period of time in order to pay back the CAC and then bring the profit. This makes the situation very difficult. Higher CAC will also reduce the LTV/CAC ratio lowering the profitability of the company.
You can increase the company’s profitability by increasing the Lifetime Value of the Customer. Companies can do this by reducing the number of customers that churn. This is easier said than done.
Another way to increase LTV/CAC ratio is by reducing CAC. This can be done by optimizing your advertising in order to acquire more customers without increasing the budget. This is a very counterintuitive approach since most people associate Paid Ads with increasing the CAC. But, if you optimize your ads effectively, your paid activities can actually drive it down.
It is true that most companies are seeing a rise in marketing costs. It’s true across the board. There are several reasons why this is happening. There is increased demand and competition for advertising space, banner blindness, and overarching macroeconomic conditions.
There are simply more advertisers battling for the limited amount of advertising inventory. This is a simple example of supply and demand. The supply of advertising inventory is limited, even though platforms like Google and Facebook find new ways to show more ads. The demand however has increased, leading to an increase in advertising costs.
Online privacy regulations are making targeting more difficult as well. That means that advertisers need to target wider audiences in order to reach the same amount of results. That leads to spending more money, and directly driving the costs upwards. Users of social media platforms are also less engaged nowadays. These are only some of the reasons behind the marketing costs growing.
With the factors we defined before affecting the increase in marketing costs, marketers are forced to switch up strategies. There are a few things that you can change to decrease the CAC and subsequently increase the LTV/CAC. They are either in the realm of strategy or ad creative.
As we mentioned before, targeting effectively is becoming more difficult. That’s why optimizing for conversions in the short term and basing the whole approach around it is not a viable strategy anymore. You need to switch your thinking to more of a long-term approach. That means investing more of the budget into the top of our funnel, educating and informing your audience, and using paid ads as one of the ways of building awareness and nurturing potential users.
Most of your Total Addressable Market (TAM) is not ready to buy your product. So, you need to be the first company they think of once they are.
Investing in educating and informing your TAM will result in much more informed buyers. Once they need your product/service, they will seek you out themselves. Since they already know so much about your product, it will lead to a shorter sales cycle, leading to lower CAC.
Building awareness by educating and informing your audience will help potential users become familiar with your company and your product. They will understand what value your SaaS Tech company will add to their business. As you educate them about your features, processes, and how your product works, they will also begin to trust you. When they are ready to buy they will reach out directly.
This ties in perfectly with the previous point. It will lead to a more educated buyer, shorter sales cycle, lower sales cost, and lower CAC.
But, Awareness campaigns are generally very "budget-friendly". It means you can reach a larger audience with a relatively low CPM. The educated and informed buyers will most likely seek you out via Direct Traffic or Organic Search, allowing you to spend more of your budget at the top of the funnel optimizing for impressions, rather than bottom of the funnel optimizing for conversions.
This efficiency will lead to lower marketing costs as well, therefore lowering your CAC once again.
Most of the time SaaS Tech companies pay disproportionately more attention to media buying optimization than to the advertising strategy or the creative. These two are actually the two most important elements of your paid advertising. People are bombarded by ads on a constant basis. An average person sees hundreds of ads per day. Most of them are terrible. Combine that with the falling engagement on social platforms and you have very low CTRs.
In order to stand out, you have to get creative. Use new, innovative visuals and messages. Make sure that your messaging is clear, concise, and catchy, and communicates your value in a way that’s easy to understand. This will help increase your CTRs and drive more traffic to your website.
A lot of people see an ad they like, and they don’t click on it. Instead, they go to the website directly, through Google Search Ads, or Organic Search. In order to increase the chances of people visiting your website, add it to your creative. Any time you use a banner or a video ad, add your website to it.
Marketing costs are on the rise, not just for B2B SaaS Tech companies, but across the board. But, when you adopt a long-term approach of educating and informing your audience, they will come to you when they are ready to buy. Combine that with awareness campaigns which are usually budget-friendly, and you have a combination that can significantly lower CAC for SaaS companies. Also, make it easy for your potential customers to find you by including your website in your visual ads.
Stefan is a marketer with 8 years of experience of working with various B2C and B2B brands.
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