Interpreting SaaS Cost of Customer Acquisition

SaaS Cost of Customer Acquisition  

SaaS Cost of Customer Acquisition (COCA) is one of the most critical SaaS metrics in determining whether a SaaS business is building a profitable business or not. COCA includes all sales and marketing expense aimed at bringing on new customers. In small and midsized companies, COCA is typically calculated as all sales and marketing expenses from a previous quarter divided by the number of new customers in a quarter.

But SaaS Cost of Customer Acquisition is important relative to other metrics, namely the average recurring revenue of a customer (ARPU) and the profitability of a customer’s recurring revenue over the probable lifetime as a subscriber — CLV.

If your SaaS Cost of Customer Acquisition is $10,000/new customer and your ARPU is $400/month, then it will take you 25 months to start making any money on this customer, and that’s without any costs to maintain the customer and assuming no churn — how realistic is that? However, if your ARPU for this customer were $2,000/month, you’d start seeing a payback in five months.  We see churn for customers paying a higher average ARPU that is usually higher than for customers paying a lower average ARPU, so the CLV on this customer would probably be better also.

At the same time, we see in our benchmarking that COCA is not solely a function of a perfect financial model where COCA payback is less than a year and CLV is at least three to four times COCA from the get-go. That would be nice, but we see a consistent trend whereby COCA is higher in the early stage of less than $10M in recurring revenues, then drops as a company becomes more efficient and it’s recurring revenues grow; then on average it increases again at some point when the company puts on gas in sales and marketing for another spurt of growth.

So COCA is also a function of a company’s stage of growth as it builds its position in the market. Obviously companies need to plan for a highly profitable financial model and prove that it is possible; but at any point in time, other goals such as faster customer acquisition, entrance into new vertical or geographic markets, etc. may impact target numbers for COCA or other key KPIs.

We’ll be looking closely at all these indicators, as well as a comprehensive set of financial and operational metrics such as detailed departmental expense numbers, hosting expense, departmental and geographic headcounts, revenues and growth rates, profit and margin metrics and more in this year’s software and SaaS benchmarking, kicking off mid-February.

This article originally appeared on Sandhill.

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