Most online businesses use a customer relationship management (CRM) software package and/or payment processor to manage their billings because handling many customers across regions by hand is difficult, and in a competitive market there is no room for errors.
For many SaaS enterprises, Stripe is the payment processor of choice. That’s because it has competitive fees among the big processors, it can handle recurring revenue streams, and it is easy to receive payments and send payouts across the globe.
However, the rudimentary analytics dashboard does not offer all of the functionality needed to maximize growth. That’s why most SaaS businesses use a third-party analytics dashboard for everything from basic SaaS metrics to financial forecasting and customer segmentation.
One of the most important metrics is customer acquisition cost (CAC). CAC represents the total cost to onboard a new paying customer. It can include everything from your sales and marketing expenses per new customer to the per customer cost of running your free trial. However, calculating CAC directly in Stripe can be difficult.
When it comes to calculating CAC for Stripe customers, along with all of the related metrics, Baremetrics excels. Baremetrics is a business metrics tool that provides 26 metrics about your business, such as MRR, ARR, LTV, total customers, and more.
You should sign up for the Baremetrics free trial, and start monitoring your subscription revenue accurately and easily.
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What is CAC?
Customer acquisition cost (CAC) is essentially how much it costs to get a new client to sign up for your service. CAC can be calculated for all of your customers to date, but it is more commonly considered over a set frequency, for example monthly or yearly, to see how the cost structure is changing.
The basic calculation is to tally up all of the expenses specifically related to acquiring new customers and then dividing it by the number of new customers.
The expenses included in CAC vary by company, but most include at least advertising and marketing expenses. You could also include the associated salaries, overhead costs, technical costs of running a free trial or any software used to track leads or conversions, and creative costs. Creative costs would include everything spent developing content for marketing campaigns across blogs and social media. That content also has associated publishing and production costs that could be included too.
The amount of expenses you include in CAC versus ACS (average cost of service), which is the month-to-month cost of running your platform, can be a personal choice, but keep in mind that CAC is used for a lot of more advanced metrics, and, if you choose to inflate/deflate your CAC by shifting costs from/to ACS that other companies prefer to put in ACS, then the target values of these advanced metrics might need to be adjusted as well.
For example, the customer lifetime value (LTV), which is the total amount of revenue garnered by the average customer over the duration of a contract, is often combined with CAC as the LTV to CAC ratio. An LTV to CAC ratio of 3 (i.e., you earn $3 in LTV for every $1 spent on CAC) is generally considered sustainable, but, if you fail to include the parts of overhead, technical costs, and salaries that are devoted to getting new paying customers in your CAC, then you may need a higher LTV to CAC ratio to reach sustainability.
If we look at the CAC formula, we can see that it can decrease in two ways:
CAC = Money Spent Acquiring New Customers/Number of New Customers
Therefore, you can improve your CAC by either reducing the amount you are spending on acquiring new customers while maintaining the same customer increase or by maintaining your budget but getting more paying customers. Of these situations, the second is the better indicator that your company is becoming more popular and that all the content you are releasing is doing its job.
How do you calculate CAC for Stripe customers?
It can be difficult to calculate all of your needed revenue, customer, churn, and MRR movement metrics including CAC for Stripe customers directly on Stripe’s limited analytics dashboard. That’s why it is important to use a third-party analytics dashboard to get the most out of your data.
Baremetrics monitors subscription revenue for businesses that bring in revenue through subscription-based services. Baremetrics can integrate directly with your payment gateway, such as Stripe, and pull information about your customers and their behavior into a crystal-clear dashboard.
Baremetrics brings you metrics, dunning, engagement tools, and customer insights. Some of the things Baremetrics monitors are MRR, ARR, LTV, the total number of customers, total expenses, quick ratio, and more.
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CAC per marketing channel
Understanding how different marketing channels bring in customers and at what price is important to maximize your growth by optimizing your marketing strategy. While it is impossible to really know how you acquired each customer just by information in cookies or what link they finally clicked when signing up for your service, if you can get information on this from surveying new customers, then it can be a great benefit to your marketing strategy.
A modern SaaS business can be running both Google and Facebook Ads, managing LinkedIn, Twitter, and Facebook pages, have a podcast, and be diligently releasing content on their website’s blog. This can make it hard to segment your CAC for Stripe customers by marketing channel.
That’s why many companies use an averaging system, where they calculate the cost of each separate channel and then allot an average number of new customers to each one. However, if you have 20 new customers and 10 channels, it is unlikely that each channel contributed exactly 2 new customers. In fact, it’s more likely that 7 of those 10 channels contributed 0 customers.
However, don’t take that to mean that those channels aren’t important. It can be the case that a Twitter account generates zero new customers until a critical mass of followers—and big name followers especially—has been generated and then very quickly over months it becomes the best source of new clients.
The other method that can be followed without directly asking your customers is called last touch attribution. This awards the new sale to the channel last touched before the sign up. For example, your new customer first saw your website through a Facebook Ad. They found your blog useful and so began to follow you on Twitter. They then clicked through a Tweet with a coupon code. The last touch attribute awards the new customer to your Twitter marketing channel.
Using CAC to make decisions
Once you have figured out your CAC by marketing channel, you can optimize your sales approach. This is important because the cost of acquiring a customer is often much higher than the cost of providing service in the SaaS industry.
Optimization has two main tasks. The first is improving your conversion rate. This is easier said than done, but essentially the idea is to reduce the friction during every step of your funnel while highlighting all the benefits of your platform during the onboarding process. For example, while a free trial can help customers become acquainted with your system, it will be more effective if you pair it with well-crafted daily emails that explain the different features, how to use them, and why they add value.
The second step is to allot your limited marketing budget to different channels based on how well they are doing. However, as mentioned above, it can both be difficult to measure the true impact of each channel, and some channels warm up over time (generally inbound marketing methods) while others tend to remain flat (generally outbound marketing methods).
One important factor to optimize your CAC for Stripe customers is to know your ideal customer profile (ICP). This is basically an idea of who your customer is and why they want your service. By getting this as detailed as possible—including their location, needs, age, interests, and budget, among anything else you can think of—you can quickly focus your marketing efforts on the right place.
CAC is an important metric. It can help you with decision making throughout the company. For example, if you have a high CAC, you might be better off increasing prices. In addition, if you have many marketing channels, CAC can help you decide on the ones that are worth focusing on. If your LTV is dragging down your CAC to LTV ratio, then it might be time to work on your dunning.
However, CAC is only part of the picture. Without LTV and a host of other metrics, it is hard to make optimal decisions. Calculating CAC for Stripe customers, along with all of these other metrics, directly in Stripe can be difficult.
So, whatever payment processor or CRM you choose, use Baremetrics to monitor your sales data.
Baremetrics makes it easy to collect and visualize all of your sales data. When you have many clients, it can be difficult to calculate your MRR, ARR, LTV, and so much more. Thankfully, there is Baremetrics to do all of this for you.