CAC is one of the most misunderstood metrics in SaaS
The reality is customers are generally either Really Cheap or Free to Acquire … Or Very, Very Expensive to Acquire
Most of us have a bunch of the former. Just not enough.
— Jason ✨Be Kind✨ Lemkin (@jasonlk) January 6, 2023
I recently meet with a very high-growth “XaaS” company. Not software as a service, but one that provides some version of humans-as-a-service. And after huge top-line growth, they were struggling now with CAC. They’d fueled their hyper growth with a combination of Adwords and Groupons and Facebook Ads and Twitter Cards. And when that party started to run out, and they had to manage their margins, growth started to plummet.
We all get that. But that ain’t SaaS. With an S. That’s just aaS.
Nowadays — as my friend and co-investor Christoph Janz of Point Nine Capital noted — most every SaaS founder seems to know the basic SaaS Playbook, or at least how the metrics should be presented and work. One that everyone presents with deep precision and seeming insight is CAC.
“I’m at $60k MRR, with a CAC or Magic Number or Sales+Marketing or whatever you call it, of 123.6 days. So we have great unit economics. We’re so proud.”
Dude — of course you do.
Let’s think about it for a minute. For most SaaS companies, as you come up on Initial Traction ($1-$1.5m ARR) and beyond here’s what happens:
- Nothing in “paid marketing” for a business-process SaaS product like Adwords or Groupon or billboards or radio or whatever really performs at this stage, so of course, you aren’t wasting (too much) scarce capital there, at least in the early days. It’s pretty darn hard to “prime the pump” with most paid B2B products. Later, once you have a Brand, you can do more. Free products, too this can work early. But for true B2B SaaS? Direct ROI is limited for most paid marketing programs in the early days.
- All of your early customers are what I call “high affinity” customers. You have no brand at $500k or $1m ARR. You don’t even have a mini-brand yet (more on that here). Usually, they find you (vs. vice-versa), even if it’s just from a Techcrunch post or whatever. And they find you and seek you out because you have something unique or at least highly differentiated that they really, really want. At least a core feature or two, that is. So your direct marketing costs are basically zero here too.
- The sales team is pretty darn efficient at $1m ARR. It has to be. Because as CEO, your cost as a sales rep is “zero,” and you only have 1-2 reps at this stage.
My only real point here is don’t sweat your CAC too much in the early days, at least not usually, at least not in business-process SaaS. It’s not even really a core metric, not really, until later. All it will really do is confirm the business is working.
Even usually up to $2m ARR or more, (x) you have no money to spend on marketing, and (y) you barely have any sales reps, so (z), of course, your CAC’s going to be low.
Just manage your spend to match your growth and ARR, spend marketing dollars on stuff that performs (even if it’s < $1 to make a $1, up to a point), and pay your reps a % of what they bring in — and CAC usually works itself out. At least for quite a while.
magic number image from here