What is customer acquisition?
Customer acquisition is the process of gaining new customers. Customer acquisition is one of the most popular growth levers for SaaS businesses because it is the most literal way to grow your customer base. Acquisition for a SaaS company means signing up new, paying customers.
However, customer acquisition is also a finicky growth strategy because it gets harder and more expensive as your customer base grows and your potential, untapped market shrinks.
Additionally, acquisition only refers to the act of getting a customer to join. Effort is shuttled into the signup event, but often not beyond. That means that acquired customers may discontinue (churn) at any point. If these customers were acquired by brute force acquisition techniques and aren't actually interested in your product for long-term use, they're more likely to churn. You'll have to be extra careful with your marketing efforts, to make sure you are reaching potential customers with profitable lifetime value.
When your acquired customers churn out, you'll have to replace that lost revenue in order to grow. If you're planning on acquiring more new customers to replace lost ones, you'll be pulling from that ever-diminishing potential market. This will leave you feeling like you're trying to fill a leaky bucket with a limited water supply.
Factors influencing a customer acquisition strategy
A good customer acquisition strategy aligns your acquisition channel, your model, your product, and your market:
This is your method of distributing your product to your potential market. For instance, you might aim for viral adoption, plan to use paid marketing strategies, or acquire new customers through user generated content marketing.
This is how you deliver value to individual customers—usually in the form of customer plans. Models match price points with an exchange of value that you've created. For instance, your business model might be a freemium plan, a scheme of various tiers with set prices, and/or custom-made enterprise plans.
This is the form of your problem/solution fit. It's the solution you have created to your market's problem. Your product might be software, a service, et cetera.
This is your base of potential customers. These are people, groups, teams, or companies that have a problem that could be solved with your product. Your market can take many shapes—it might be other SaaS companies, enterprise retail companies, brick-and-mortar clothing stores, et cetera.
Whatever acquisition channel you use has to match up with specific qualities of your product, your market, and your model.
For example, if you want to acquire through a viral channel, you need to make sure your product has a quick time to value and a broad value proposition. You'll target a large market of low-value, low-CAC customers. You might choose a model like freemium to deliver this value to these customers.
A strong acquisition strategy means alignment across these four components of your business.
Is customer acquisition the most effective way to grow?
The SaaS community is obsessed with acquisition. We talk about it a lot. By studying 25,679 blog posts—to see what the SaaS community is interested in—we found that nearly 8 out of every 10 posts were about acquisition.
But even though acquisition is a vital growth lever, it is often overplayed at the expense of other growth opportunities. Retaining customers (getting them to continue using your product) and monetizing customers (improving the way you earn revenue) are other important and hugely effective ways to grow your SaaS business.
A 1% improvement in customer acquisition results in a 3.32% increase in bottom-line revenue. Meanwhile, a 1% improvement in customer retention results in 6.71% bottom-line improvement. Improving monetization by 1% results in a 12.70% increase in your bottom-line revenue.
Customer retention and monetization cannot be overlooked when you're building and expanding a SaaS company, so monetization and retention analysis should be used in tandem with acquisition strategies to achieve maximum growth.
Read more about growth through acquisition, retention, and monetization here.
When is customer acquisition important?
Though acquisition is important throughout all stages of growing a SaaS company, it's most important at the beginning when you can't take advantage of other growth levers like retention and monetization.
In the early stages, you can give acquisition a little more attention. It's especially essential because at this point you need to focus on acquiring the right first-time customers and developing sustainable acquisition strategies. These early strategies will compound and iterate as your business grows. Setting up a good foundation of early customers will make acquisition, retention, and monetization easier later on.
According to SaaS VC Jason Lemkin, the first 10 unaffiliated conversions is an early indicator that your SaaS company will be successful. This is because these first early adopters have all come to the conclusion on their own that your product solves their problems. Your first conversions give you validation that your problem/solution fit is a viable business idea.
These early acquisitions are important in their own right, but they also provide a valuable learning opportunity to set your business up for future success. It's important at this stage to measure the lead generation channels and demographics (company type, job title, age range, etc.) of your acquired customers. By recognizing early patterns, you can develop an idea of your target audience to create a strong long-term acquisition strategy.
Understanding your market, even in these early stages, will also help you retain and monetize customers because you'll better understand what value propositions are important to them.
Read more about early conversions and important metrics for different SaaS stages here.
What are the costs of customer acquisition?
Customer acquisition is important to your SaaS company and should be used strategically—but focusing too much on acquisition has high costs.
On a qualitative level, a blind focus on acquiring logos prevents you from focusing on more sustainable growth methods. Acquisition is the SaaS growth equivalent of using a sledge hammer—it often isn't precise or strategic, and you don't have that many chances to do it effectively.
The most reliable way to grow your business steadily and over a long period of time is by identifying and capitalizing on the value that your customers want from your product. This happens by talking to your customers, collecting data on your market, and analyzing the data for patterns about what your customers value and what they're willing to pay.
This is how you'll redesign your pricing strategy to better monetize your customers.
On a quantitative level, focusing too much on your customer acquisition process can lead to your company becoming a “CAC fiend.” Customer acquisition cost, or your company's spend on each customer, is essential in acquisition. That's why you need to know your fully-loaded CAC to fully understand the unit economics of your business.
It breaks down to dividing the total expenses to acquire customers by the total number of customers acquired:
Customer Acquisition Cost Formula
The numerator has to include all acquisition-related expenses in order to calculate a fully-loaded CAC. This includes monthly spend on paid advertising, sales and marketing costs, and the salaries for sales and marketing team members. It can add up quickly and may be higher than many companies realize.
To minimize these costs, your acquisition needs to be strategic and targeted—not expansive and haphazard.
Read more about why your company shouldn't be a “CAC fiend” here.