Cost of Acquiring Customers Rising
Posted by Jeff Lu on May 14, 2009
I came across a Bessemer presentation, made by Philippe Botteri and Byron Deeter at this year’s DreamForce, which I found to be really insightful for SaaS companies.
The presentation is long but it’s worth it. The first 20 minutes is on valuation metrics for SaaS companies and the next 20 are on the macro-economy. I didn’t watch the final 20 minutes which was on accounting topics relevant to SaaS companies. A pdf of a similar presentation can be downloaded here.
This post will cover Customer Acquisition Costs and how the current economic climate has affected the ability for SaaS companies to acquire customers at an acceptable ROI.
14:50 – Customer Acquisition Costs (CAC) ratio. I love this ratio since it’s easy to compute, easy to understand and it’s very telling to how effective your sales & marketing team and executives can respond immediately.
Clearly, we all know that SaaS valuations, along with the rest of the market have been getting hammered, but what about their operating performance? How efficiently have SaaS companies acquired customers? Well let’s see:
- SaaS Valuation & Metrics
It looks like there’s not much of a change to the CAC ratio from Q1 2009 to Q4 2008, still requiring 2.5-3 years to payback (in revenue) sales & marketing efforts. This is about twice as long as the CAC Payback Period in Q1 2008.
Let’s keep it simple and think about it in terms of Return on Investment (ROI).
IRR Multiplication Table
If the average SaaS company requires 3 years to get paid back on their sales & marketing investment. That means it’ll take them 6 years to double their money. That’s a 12.2% ROI. I wonder what the average lifetime of a customer actually is though. 6 years seems a bit optimistic to me.
Regardless, assuming the avg lifetime is 6 years, that’s still a respectable ROI but let’s consider the case of a venture stage SaaS company. VC’s aren’t looking for companies with CAC’s of 0.3. If you want to get the attention of professional money, get your CAC closer to 1.
I would love to get more input on this topic. Please feel free to comment or email me.
