Insight SaaS (4): The ‘Growth’ metric of SaaS — — CACPP

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The previous article ‘Insight: SaaS (3) The core metric of SaaS — — NDR’ discussed NDR, the most important metric of a SaaS company’s overall operation, and how to improve your retention rate. Long-term growth is reflected by high retention rates. We’ll start with another metric that influences the company’s growth rate in this article.

Only companies with growth speed up to the standard are top SaaS companies. When your ARR reaches 1million, the Compound Annual Growth Rate in the next few years should be 3x, 3x, 2x, 2x, then how can we observe our corporate growth rate through an indicator?

The metric is CACPP (Customer Acquisition Cost Payback Period).

We must first define CAC and CRC before calculating CACPP.

1. CAC (Customer Acquisition Cost)

CAC is all Marketing & Sales costs from the period divided by the number of deals committed during the month. If the time from the marketing campaign to WIN — also known as the sales cycle — is 90 days, we recommend calculating all the costs over three months. Key components of the Customer Acquisition Cost:

1. Sales & Marketing employee’s salaries and on target bonus.
2. Content expenses: Videos, blogs, advertisements, and much more.
3. Other expenses on tools: CRM and much more.

In general, CAC refers to all of the costs associated with acquiring a new batch of customers.

2. CRC (Customer Retention Cost)

Customer Retention Cost should include all expenses a company incurs in retaining and cultivating its existing customers. Key components of the Customer Retention Cost:

1. CSM and Account Management Team’s salaries and on target bonus.
2. Support services or help center expenses.
3. Hosting fees.
4. The salary of engineers in the R&D department that supports SaaS operations. No salary costs for R&D for the new version’s development.

Generally speaking, the CRC covers all of the costs involved in maintaining a group of existing customers.

The meaning of CACPP is obvious once you understand CAC and CRC: how much time do you need to spend to recover a marketing expense. CACPP is a metric that measures a company’s sales efficiency and is required before more resources are invested.

If your MRR is $500, your CRC is $100, and your CAC is $4,000, your CACPP will be 4000/(500–100) = 10 months. You’ll need to spend $4000 to acquire each customer, and then another ten months to recoup your investment.

A good SaaS company’s CACPP is less than 8 months, while an average SaaS company’s CACPP is around 12 months. CACPP reflects how quickly a SaaS company can expand.

Assume a company has raised $1 million dollars and plans to spend it on marketing to attract new customers. Every month, the profits are reinvested in new customer acquisition. Let’s take a look at how changes in the CAC Payback Period will affect the MRR. A single customer’s monthly profit is $500.

We can see that the company (CACPP 8 months) will have an MRR of $465,500, which is more than twice the CACPP12-months’ MRR. When the CACPP falls, it indicates that the company has more cash flow and more cash reserves with which to flex its muscles. The leverage effect of companies with low CACPP is more obvious for the same scale of financing. SaaS businesses can devote more resources to acquiring customers, allowing them to expand more quickly.

Unlike LTV (Life Time Value), which requires 3–4 years of operation time to calculate, CACPP is a metric that can be calculated at any stage of a SaaS company’s lifecycle. LVT cannot be accurately measured in the early stages. CACPP can be used instead. LTV/CAC could be calculated later, and in good cases, it can be greater than 8 (LTV/CAC> 4 normally). CACPP is a metric that reflects a number of fundamental aspects of a SaaS company, including the product’s tech level, sales efficiency, price, and operational costs.

So how to reduce CACPP?

1. Increasing sales efficiency and lowering CAC.

The most direct way to reduce CACPP is to increase the company’s sales efficiency. Find a way to optimize your sales process and reduce transaction time if your average customer transaction period is 4 months. The same sales investment will result in more customers, a lower CAC, and a higher MRR. Fixing your sales method, which is to standardize the sales process, is the most effective method. There are clear sales strategies throughout the Leads to Cash funnel, including talking points, skills, frequency, and so on.

2. Raise the price

Almost all SaaS products have undervalued prices. MRR will rise dramatically if you can raise the price of your products. The most beneficial strategic weapon is price adjustment. In the field of 2B, sales difficulty and product prices are frequently unrelated. Raising product prices does not always result in a longer sales cycle. Customers are not purchasing low-cost SaaS products, but rather high-value SaaS products. The SaaS industry has never been one to undertake low-cost competition.

3. Decrease maintenance costs, lowering CRC.

This will demand the engagement of the entire engineering team. More valuable are products that require less manual intervention. The benefits will increase if maintaining a SaaS product requires lower costs. When you are unable to optimize your sales or marketing process, a small cost reduction will have a significant impact on the overall situation.

4. Increase the CSM team’s efficiency and lower the CRC.

A mature SaaS company’s CSM manager may be responsible for the renewal of an ARR of $2–5 million, with 10–500 accounts. Streamline the CSM workflow and increase their performance. The introduction of some SaaS tools for customer service (like Zendesk), for example, can assist them in answering customer questions.

The next article ‘Insight: SaaS (5) Find PMF before the scale’ is published. Simply send me some claps and feedback if you enjoyed my article.