Customer Acquisition Cost vs. Retention: How to Strike the Right Balance

November 19, 2019

Customer Acquisition Costs: Why it Might Make More Sense to Focus on Retention

Do you understand the costs of attracting a new customer to your business, and your return on investment (ROI) based on their lifetime value? Even though your customer acquisition cost is one of your most critical business metrics, making sense of it can be a little more complex.

In fact, there’s a good argument that subscription businesses in particular should focus more on retaining existing customers and reducing churn rate—rather than spending most of their marketing and sales budgets on attracting new customers. 

We think it’s an interesting comparison worth exploring—so let’s dig into the details of customer acquisition versus retention, so you can decide where to focus your efforts.

There’s No Such Thing as a Zero Churn Rate: Customer Acquisition is Always Needed

Reducing your churn rate and minimizing lapsing customers should always be front-of-mind for a subscription business. Fortunately, there are plenty of initiatives you can use to encourage customers to stay on board for the long-term. There’s just one problem—no matter how many customer retention projects you successfully complete, you’ll always have some churn. Customers go out of business and organizational priorities change over time. You might reduce your annual rate to ten, five, or even one percent, but you’ll never get it to zero.

This means customer acquisition still matters, for two reasons:

  • Subscription businesses can never stand still, you always need to replace customers you lose.
  • You want to grow your business, which means spending some money on customer acquisition.

The question is, where is the balance between retention and acquisition? That comes down to your costs.

The Software as a Service Customer Acquisition Cost (SaaS CAC) Benchmark 

The SaaS CAC is a measure of how much SaaS companies pay to acquire new customers based on how much they spend versus what they receive in subscription costs in annual recurring revenue (ARR).

For example, if you spend an average of $200 to acquire a new customer, and they spend $300 per year with your business, your SaaS CAC would be $200 / $300 or 0.67. The average a SaaS business pays to acquire customers was recently calculated over on the LATKA B2B SaaS blog. Here are average CAC benchmarks across over 1,400 organizations, based on how much investment a SaaS business has received. 

  • Bootstrapped businesses with no external investment have an average CAC between 0.47 and 0.61 for up to $50 million in ARR, falling to a CAC of 0.18 above that ARR.

  • Businesses that raise up to $1 million in funding have an average CAC between 0.39 and 0.41 for up to $10 million in ARR, increasing to a CAC of 0.71 above that ARR.

  • Businesses that raise between $1 million and $10 million in funding have an average CAC of 0.54 at lower ARR amounts, increasing to 0.77 as ARR goes up.

  • Businesses that raise between $10 million and $100 million in funding have an average CAC of 0.46 at an ARR of up to $1 million, which increases rapidly as ARR goes up, a CAC of 1.18 when ARR is above $50 million.

When a SaaS business is just starting out, the average CAC hovers around 0.4 to 0.55. These numbers can be a useful starting point when you’re calculating your customer acquisition cost.

Calculating Your Customer Acquisition Cost

Let’s break down how you’d calculate your own CAC. Note that all of these costs and your total customers acquired should be calculated for the same fixed period, typically up to a year:

  1. Work out how much you spend on your marketing budget to acquire (not retain) customers. This should include online and offline promotions, advertising across all channels, and any other discretionary spending designed to get your brand or product in front of potential leads.
  1. Add to that the total cost of compensation (salary and benefits) that you pay to your marketing, sales, and any other teams involved in onboarding new customers. You should also include the costs of providing working space, utilities, workstations, and supplementary services to those teams.
  1. Add to that the cost of all your marketing, sales, and operational software and services that you use to acquire customers. 
  1. Add to that any professional services like freelancers, designers, legal, or other services you use for marketing, brand promotion, or other customer acquisition.

  2. Add in any other overheads for your marketing and sales teams.

  3. Once you’ve added all of that together, that’s your total cost to acquire all customers over that period of time.

  4. Then, simply divide that total amount by the number of new customers you acquired (not your total customer base) that are paying for your services. This gives you the total dollar cost of acquiring each customer.

  5. Divide that dollar cost by the average amount of revenue per customer over the time period for your final CAC.

Calculating Your Customer Retention Cost

If you want to balance the cost of acquiring new customers versus the cost of retaining them, you need to work out your customer retention cost. Like the acquisition cost, this should be calculated over a fixed period, both for the total costs and for the number of customers retained. 

  1. Work out how much you spend on your sales, customer success, customer service, marketing, and other operational teams to retain customers. This should include any money spent on communicating with existing customers, demonstrating the value of your product, or development costs designed to modify the product so it appeals to your existing customer base.
  1. If you’ve not already included it, add to that the total cost of compensation (salary and benefits) that you pay to your sales, customer success, customer service, marketing, and other operational teams involved in retaining customers. You should also include the costs of providing working space, utilities, workstations, and supplementary services to those teams.
  1. Add to that the cost of all the software you use to retain customers, like analytics, communications, CRM, etc.
  1. Add to that any professional services like freelancers, developers, and similar experts dedicated to customer retention.
  1. Add in any other overheads for other retention activities.
  1. Once you’ve added all of that together, that’s your total cost to retain all customers over that period of time.
  1. Next, calculate how many customers you’ve retained over that time period. Be careful to exclude any new customers you’ve acquired during that time, or you’ll get an incorrect calculation. 
  1. Divide your total cost by the number of customers you’ve retained to come up with your average retention cost per customer. 
  1. Divide that dollar cost by the average amount of revenue per retained customer over the time period for your customer retention cost (CRC) that you can compare to your CAC.

Balancing the Costs of Customer Acquisition vs. Customer Retention

According to SaaSX, on average it costs nine times less to retain existing customers than acquire new ones. Your calculations might be different, but it serves as a useful guideline to how retention and acquisition should be balanced.

So, the question is, what’s the balance for spending when you’re looking at retention or acquiring? You’ll need to bring several factors together to make the right decision, specifically:

  • Your churn rate and your retention rate.
  • Your total cost of acquisition.
  • Your cost of acquisition per customer.
  • Your CAC, which is your cost of acquisition divided by revenue over the same period.
  • Your total cost of retention.
  • Your cost of retention per customer.
  • Your CRC, which is your cost of retention divided by revenue over the same period.

Together, these figures will tell you how acquisition and retention are performing in your business, especially when compared to each other. With that data, you can start to shift your priorities around, for example:

  • If your CAC is significantly lower than the benchmarks we shared above, you might want to put more money into marketing.
  • If retention costs are only 20 percent of acquisition costs, it could make sense to spend four or five times as much on retention.
  • If churn rates are high, you will want to spend money on retention activities like customer success and customer service.
  • If your total costs of acquisition or retention are higher or lower than expected, you can adjust budgets accordingly.

Ultimately, you’ll need to make some decisions and track how those changes impact your growth, retention rate, and revenue over time. You can then tweak further to find the right line between investing in retention vs. acquisition.

The Uptick platform gives you valuable data to help minimize churn and maximize customer retention, so if you’re looking for deep insight and opportunities for growth, it could give you the business intelligence you need. 

Do you understand the costs of attracting a new customer to your business, and your return on investment (ROI) based on their lifetime value? Even though your customer acquisition cost is one of your most critical business metrics, making sense of it can be a little more complex.

In fact, there’s a good argument that subscription businesses in particular should focus more on retaining existing customers and reducing churn rate—rather than spending most of their marketing and sales budgets on attracting new customers. 

We think it’s an interesting comparison worth exploring—so let’s dig into the details of customer acquisition versus retention, so you can decide where to focus your efforts.

There’s No Such Thing as a Zero Churn Rate: Customer Acquisition is Always Needed

Reducing your churn rate and minimizing lapsing customers should always be front-of-mind for a subscription business. Fortunately, there are plenty of initiatives you can use to encourage customers to stay on board for the long-term. There’s just one problem—no matter how many customer retention projects you successfully complete, you’ll always have some churn. You might reduce your annual rate to ten, five, or even one percent, but you’ll never get it to zero.

This means customer acquisition still matters, for two reasons:

  • Subscription businesses can never stand still, you always need to replace customers you lose.
  • You want to grow your business, which means spending some money on customer acquisition.

The question is, where is the balance between retention and acquisition? That comes down to your costs.

The Software as a Service Customer Acquisition Cost (SaaS CAC) Benchmark 

The SaaS CAC is a measure of how much SaaS companies pay to acquire new customers based on how much they spend versus what they receive in subscription costs in annual recurring revenue (ARR).

For example, if you spend an average of $200 to acquire a new customer, and they spend $300 per year with your business, your SaaS CAC would be $200 / $300 or 0.67. The average an SaaS business pays to acquire customers was recently calculated over on the LATKA B2B SaaS blog. Here are average CAC benchmarks across over 1,400 organizations, based on how much investment a SaaS business has received. 

  • Bootstrapped businesses with no external investment have an average CAC between 0.47 and 0.61 for up to $50 million in ARR, falling to a CAC of 0.18 above that ARR.

  • Businesses that raise up to $1 million in funding have an average CAC between 0.39 and 0.41 for up to $10 million in ARR, increasing to a CAC of 0.71 above that ARR.

  • Businesses that raise between $1 million and $10 million in funding have an average CAC of 0.54 at lower ARR amounts, increasing to 0.77 as ARR goes up.

  • Businesses that raise between $10 million and $100 million in funding have an average CAC of 0.46 at an ARR of up to $1 million, which increases rapidly as ARR goes up, a CAC of 1.18 when ARR is above $50 million.

When a SaaS business is just starting out, the average CAC hovers around 0.4 to 0.55. These numbers can be a useful starting point when you’re calculating your customer acquisition cost.

Calculating Your Customer Acquisition Cost

Let’s break down how you’d calculate your own CAC. Note that all of these costs and your total customers acquired should be calculated for the same fixed period, typically up to a year:

  1. Work out how much you spend on your marketing budget to acquire (not retain) customers. This should include online and offline promotions, advertising across all channels, and any other discretionary spending designed to get your brand or product in front of potential leads.
  1. Add to that the total cost of compensation (salary and benefits) that you pay to your marketing, sales, and any other teams involved in onboarding new customers. You should also include the costs of providing working space, utilities, workstations, and supplementary services to those teams.
  1. Add to that the cost of all your marketing, sales, and operational software and services that you use to acquire customers. 
  1. Add to that any professional services like freelancers, designers, legal, or other services you use for marketing, brand promotion, or other customer acquisition.

  2. Add in any other overheads for your marketing and sales teams.

  3. Once you’ve added all of that together, that’s your total cost to acquire all customers over that period of time.

  4. Then, simply divide that total amount by the number of new customers you acquired (not your total customer base) that are paying for your services. This gives you the total dollar cost of acquiring each customer.

  5. Divide that dollar cost by the average amount of revenue per customer over the time period for your final CAC.

Calculating Your Customer Retention Cost

If you want to balance the cost of acquiring new customers versus the cost of retaining them, you need to work out your customer retention cost. Like the acquisition cost, this should be calculated over a fixed period, both for the total costs and for the number of customers retained. 

  1. Work out how much you spend on your sales, customer success, customer service, marketing, and other operational teams to retain customers. This should include any money spent on communicating with existing customers, demonstrating the value of your product, or development costs designed to modify the product so it appeals to your existing customer base.
  1. If you’ve not already included it, add to that the total cost of compensation (salary and benefits) that you pay to your sales, customer success, customer service, marketing, and other operational teams involved in retaining customers. You should also include the costs of providing working space, utilities, workstations, and supplementary services to those teams.
  1. Add to that the cost of all the software you use to retain customers, like analytics, communications, CRM, etc.
  1. Add to that any professional services like freelancers, developers, and similar experts dedicated to customer retention.
  1. Add in any other overheads for other retention activities.
  1. Once you’ve added all of that together, that’s your total cost to retain all customers over that period of time.
  1. Next, calculate how many customers you’ve retained over that time period. Be careful to exclude any new customers you’ve acquired during that time, or you’ll get an incorrect calculation. 
  1. Divide your total cost by the number of customers you’ve retained to come up with your average retention cost per customer. 
  1. Divide that dollar cost by the average amount of revenue per retained customer over the time period for your customer retention cost (CRC) that you can compare to your CAC.

Balancing the Costs of Customer Acquisition vs. Customer Retention

According to SaaSX, on average it costs nine times less to retain existing customers than acquire new ones. Your calculations might be different, but it serves as a useful guideline to how retention and acquisition should be balanced.

So, the question is, what’s the balance for spending when you’re looking at retention or acquiring? You’ll need to bring several factors together to make the right decision, specifically:

  • Your churn rate and your retention rate.
  • Your total cost of acquisition.
  • Your cost of acquisition per customer.
  • Your CAC, which is your cost of acquisition divided by revenue over the same period.
  • Your total cost of retention.
  • Your cost of retention per customer.
  • Your CRC, which is your cost of retention divided by revenue over the same period.

Together, these figures will tell you how acquisition and retention are performing in your business, especially when compared to each other. With that data, you can start to shift your priorities around, for example:

  • If your CAC is significantly lower than the benchmarks we shared above, you might want to put more money into marketing.
  • If retention costs are only 20 percent of acquisition costs, it could make sense to spend four or five times as much on retention.
  • If churn rates are high, you will want to spend money on retention activities like customer success and customer service.
  • If your total costs of acquisition or retention are higher or lower than expected, you can adjust budgets accordingly.

Ultimately, you’ll need to make some decisions and track how those changes impact your growth, retention rate, and revenue over time. You can then tweak further to find the right line between investing in retention vs. acquisition.

The Uptick platform gives you valuable data to help minimize churn and maximize customer retention, so if you’re looking for deep insight and opportunities for growth, it could give you the business intelligence you need. 

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