Why CAC for PLG (Product-Led Growth) in SaaS is Broken: A Critical Analysis for Growth Teams

by Akshay Patel

Note: This article matters to you if you are thinking about PLG, building SaaS, or Operating SaaS as a Product Manager, CFO, Founder, CEO, CTO, CPO, COO, Cloud Architect.

Modern Software as a Service (SaaS) companies continue to adopt?Product-Led Growth (PLG) as a winning strategy to acquire new customers at scale. In a past blog, Act Now or Lag Behind: Why SaaS Leaders Can’t Afford to Overlook PLG on AWS, I brought my own experience as a product leader and experience in working with 100s of customers globally into seven simple steps of executing PLG successfully.

If curious, OpenView, Blake Bartlett, and Kyle Poyar have done an amazing job in putting PLG on the map of SaaS and have put together in detail "What is Product-Led Growth"

While we have coined the definition of SaaS as,

"Software-as-a-Service (SaaS) is a business and software delivery model that enables organizations to offer their solution in a low-friction, service-centric approach at scale. The SaaS model relies on agility and operational efficiency as pillars of a business strategy that promotes growth, reach, and innovation."

With PLG, as a subset of modern SaaS go-to-market (GTM) strategies, we define this as

“In PLG, the organizational mindset shifts from believing a product is the thing you sell, to the product becoming part of the experience you lead with.”?

If we look at PLG from the lens of a traditional customer acquisition funnel, the concept of PLG is to broaden the funnel for more customer acquisition and shorten the time from which the customer discovers the solution, tries, and buys.?

Broader funnel and faster customer acquisition sounds great. Does this mean a SaaS company should spend more in acquiring the customer? In SaaS, CAC (Cost to Acquire a Customer) is the metric used to measure how much a SaaS company should spend to acquire customers.?Hhmm?!?

For PLG, CAC is BROKEN!

And many SaaS providers don't even know this.

What is CAC?

CAC is a metric that measures the cost of acquiring a new customer for a SaaS company. It takes into account all the costs associated with acquiring a customer, including marketing and sales expenses, and divides it by the number of new customers acquired during a given period.

How is CAC calculated?

CAC is calculated by adding up all the costs associated with acquiring new customers, including marketing and sales costs, then dividing it by the number of new customers acquired during a given period.?

For example, if a SaaS company spends $100,000 on marketing and sales in a quarter and acquires 100 new customers during that period, the CAC would be $1,000.?

Why is CAC for PLG broken?

The traditional CAC formula works well for sales-led go-to-market models. In PLG, there is usage of the SaaS offering during the trials period before a portion of these users become paying customers. Imagine that every month, 1000 users try the product and only 100 convert into paying customers. The cloud usage during the trial period becomes part of the customer acquisition cost.?

The new and improved CAC for PLG:

Where the Growth Product Cost is the total cost during try-to-buy, freemium, or other strategies:

The growth team is growth product managers, product analytics/data scientist, growth R&D teams, and onboarding customer success team. This is your growth pod. Your product cost includes cost of the infrastructure, tooling, and experimentation.??

So let’s take the same example as before, if a SaaS company spends $100,000 on marketing and sales in a quarter and $20,000 on product costs, the new CAC to acquire 100 new customers during that period, the CAC would be $1200.?

Dilemma or Opportunity?

By adding this new parameter of cost in the CAC for PLG formula, both PLG and SaaS looks bleak. Suddenly it feels like cost of acquiring the customer went up. Not really. It’s in fact a missed opportunity:

• PLG broadens the funnel. The point of PLG, is to broaden the funnel and reach out to as many potential customers as possible. If done well, the opportunity is to open up to new growth segments. You now have an investment becomes more deliberate in targeted marketing, delivering moments of wow’s and aha’s, and optimizing sales teams to close the deals faster.?
• PLG is a land and expand strategy. The investment in CAC for PLG, should be to maximize both logo acquisition at the most optimum acquisition revenue. The end game is not acquire, its also expand! Investing with?customer success teams drives more revenue per customer.
• The overlooked unit in CAC: CAC is a measure of Cost to Acquire over a “period.” PLG forces you to optimize the user experience to drive the user to “value” faster and therefore result in more “paying customers.” Embedding data into the user experience means opportunity to discover new value.?
• Investment in growth teams. Now that we have a way to measure for investment with CAC for PLG, teams can justify the investment to drive experiments and growth hacks. This drives a reason for traditional business models to re-evaluate how the organize for customer outcomes.?
• The tech stack has a business strategy: Product architecture and technology choices become more deliberate. There is a business necessity for just right sized and just in time deployments to minimize the cost of “non-converted customers” and optimize for acquiring customers through experimentation, data, AI/ML/Generative AI, and analytics. ?

SaaS Architecture for PLG: The tech stack must align with the business strategy with PLG and the following are key discussions to bring in the technology teams into early:

1. Should our?trial or run on the same existing architecture as our premium customers???
2. If I choose multiple architectures how will I move an end customer across my stacks??
3. Will my architecture be cost-prohibitive to expand into new regions, markets?
4. How will I enable rapid experimentation on my platform??
5. Are we ready to scale?
6. What is my unit cost measures?

Considering the trial experience as a tiered offering in architecture means leveraging the right technologies. As a product leader, I am in a position to partner and influence technology.

For example, A free tiered architecture model must based on Serverless and Container technologies. My expectation is that the complete architecture, application and infrastructure, must be deployed on the fly as the customer onboards, and immediately gets torn down as the customer off-boards.

Automation, experimentation, canary or blue/green deployments, generative AI, and metrics are non-negotiable for both business and technology teams.

Measure Everything: Unit costs being key here. I am looking for various metric measurements to drive an informed and growth mentality.

Unit costs include:

1. cost per tenant,
2. cost per Feature,
3. cost to onboard and offboard,
4. cost per experiment,
5. cost of time to turn into revenue,
6. cost of engagement,
7. cost of architecture,
8. cost of service...etc

PLG can be game changing for a company. No offering is too complex. If you measure it right, you will succeed. With that I leave you some Quotes.

"If you can't measure something, you can't understand it. If you can't understand it, you can't control it. If you can't control it, you can't improve it" by H. James Harrington

"What gets measured gets done, what gets measured and fed back gets done well, what gets rewarded gets repeated" by John E. Jones

"When dealing with numerical data, approximately right is better than precisely wrong" by Carl G. Thor

"Not everything that can be counted counts, and not everything that counts can be counted" by Albert Einstein?

Thanks. Do leave some thoughts. Even if you disagree.