Everyone’s always looking for the best formula to calculate customer acquisition cost, especially in SaaS industries. There are a lot of business strategists and mathematicians who have spent years of their careers trying to map the dynamics and variables to get the best results for this conundrum. Some of them have had some pretty decent success, but that unified theory remains elusive for now. Or does it?
The thing is, this is something somewhat dependent on corporate culture, application and demographic. However, there may just be some practical process for calculating this that, while not accurate to the halfpenny may at least be accurate enough for real world figures.
Sure, the sciences seldom fail when it comes to working out calculation strategies for any given thing, but honestly, who has the time for that when there’s a business to be run? So, let’s take a minute and look at a common sense way to calculate customer acquisition cost, so that we may get the best results without having to resort to calculus or something equally absurd.
The first thing to factor in is general overhead for the service. How much expense goes into serving it, maintaining it and paying the employees that facilitate this service? This is of course also a factor to consider in pricing the units, which is in turn a second thing to consider.
That said, what is the price per unit of the product, in this case subscriptions to your software service? The overhead must never exceed the unit price, and the unit price should exceed it by at least 6%.
Moving on to the next factor, incentives. Regardless the SaaS model you are using, there are going to be times you need to incentivize your customers to ensure purchase, continued subscriptions or conversion from free accounts. These incentives cost money, so measure how much money this is. Again, it should be 6% or more lower than unit cost per customer.
Finally, there is the factor of outreach. How much does advertising cost? It should not cost, if divided among predicted or existing user base, more than 2% per unit of the unit cost of subscriptions. If it goes higher, then the customer acquisition cost will eat profits, and it will drive the expenses on existing customers higher, which will result in churn on top of inefficient acquisition methodologies.
With these factors worked out, the best calculation, without being too purely mathematical is as follows. Unit cost must exceed overhead by 6%, and it must exceed incentives by 2%, meaning a combined factor of 8% versus unit cost. Factor in another 6% per customer for outreach, and you get a combined loss of 14%. Ergo, to get the best customer acquisition cost, it must be 14% or lower per customer unit, than the customers pay for the service once established.
This is a bit of a soft way to calculate customer acquisition cost , and as such, it leaves some room for tweaking here and there. It’s all in percentages and weighed values, rather than advanced curve formula.