Let’s rethink Customer Acquisition Costs

CAC

Photo by micheile dot com

I am going to propose a somewhat radical idea: there is a good chance you have been miscalculating your CAC (Customer Acquisition Costs). Yes, this is somewhat of a sobering opening line, but it needs to be said sooner rather than later. 

Let me explain: 

The traditional way of defining your CAC has been through the lens of marketing and sales. This metric usually looks at the costs of advertisements and related overhead. Here’s the problem with this line of thinking. This step is not where customer acquisition begins, it begins in the product. 

Customer Acquisition Cost Formula

This is the old way.

Investing money into the traditional model of CAC may get users to your product, but if they can’t use it quickly, it really doesn’t matter how much money is being spent on attracting users.

To be fair, the traditional approach to the measurement of the CAC costs does have some bearing on acquiring users. Marketing is instrumental in funneling the right prospect, aligning expectations and reality to a reasonable degree. In a way it is the customer alignment costs. 

There are a few marketing and sales exceptions that do have a bearing on the actual conversion of customers. 

  • Sales team. Having a sales team that also doubles as a user onboarding team can have a huge impact in retaining and converting customers. SemRush is a great example of this. They have a dedicated team that balances upselling and guiding users to their SEO goals. While a great sales team will always be valuable, it is a never ending cost. Having a product that can onboard people intuitively is an investment. 
  • User onboarding emails. There are 5 emails a successful user onboarding experience should follow to compliment the stages of first time users.  While the product is doing the majority of the work, emails are offering an extra helping hand to remind users.

Because of this distinction, I will categorize CAC into two different metrics.

  • Marketing CAC  (M-CAC) will cover the traditional costs, marketing and sales.  
  • Product CAC (P-CAC) will cover product design related costs that get users to become customers.  But what exactly does that mean you ask? 

Great question! These would be the design costs related to the parts of the product experience where users convert into customers, the user onboarding experience. This usually happens in a 2-4 week period, over the course of a product’s trial

The bare minimum costs to look at with P-CAC

  • Labor 
    • Product strategy 
    • UX design 
    • UX research
    • UI design 
  • Tools 
    • Design software 
    • Analytics software
  • Engineering

I want to emphasize this is a simplified cost approach to the P- CAC. Each organization will need to adjust as needed. This approach has more bearing for those who are looking for a product-led style, using the UX and UI to guide users to their goals with little-to-no outside help. If a product-led approach isn’t part of your SaaS strategy, your sales team will probably be doing a lot of acquisition legwork.

1. Other metrics to look at

Product CAC is hardly the only money related product metric with user onboarding. Here are a few other things to measure for your product’s financial health. 

DAU and MAU
One of the cornerstone metrics for user onboarding is Daily and Monthly Active Users. 

Active Daily users are defined by those that engage with the product in any way within a 24 hour period. Active Monthly users are the individuals who have engaged with the product in one way or another over the course of a month. This can mean simply logging in.

Dividing your Daily Active Users (DAU) by your Monthly Active Users (MAU) can give you a sense of your product’s “health.”

daily and monthly users

Illustration by Priyanshi Bareja, Raivix

Of these two metrics, Monthly Active Users is the one that you want to keep your eye on. There is no set standard for this metric, but usually apps over 20% are said to be good, and 50%+ is world class.

CHURN
Churn is how many SaaS users are abandoning a product in a given month. An acceptable range for a month is  3-8%. Figuring out your churn rate is quite easy.

churn Rate

Illustration by Priyanshi Bareja, Raivix

2. Look at the bigger picture

You may be asking what is the point of this distinction between P-cac and M-cac? The money is being spent regardless, right? 

It gets organizations to look at the bigger picture.

Imagine you have a car that is running a bit slow. You take it to the mechanic and they say the engine is fine, but neglect to look at the low pressure tires. Knowing what part of your product’s “body” to look at for performance optimization will help you know where to invest the most labor and money.

3. Drive value

Investing in marketing to drive prospects to your product is a necessary expense in the customer lifecycle. But those costs are fleeting, a huge portion of your budget that “tells” the user about the value in maybe a few seconds (if you are lucky). Investing in your product not only has the potential to improve adoption, retention and customer loyalty, it improves how your product “shows” value to your users (aka future customers). This subtle difference is another reason why there should be a demarcation between the two types of CACs.  Showing always beats telling when courting someone’s attention. 

4. Conclusion

Designing a product with great UX can be your greatest marketing tool. We all know the value of social proof and positive testimonials. This is such a powerful marketing tool that it applies in any transactional experience. The last time you were looking for restaurants to eat, how much did the reviews, both the stars and previous patron’s comments play a role in your decision making process? 

Designing a great user onboarding experience lays the foundation for a great product experience. Believe us, we’ve checked. Investing in great product design might be a much higher financial threshold than marketing. But, and not to be a broken record here, good marketing will never overcome an anemic product.

Are there any product related metrics that you’re looking to improve? Schedule a quick consultation with us and we’d be happy to help.

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