Higher Growth And Lower CAC — Optimise Your Conversion Funnel! (Part 1)

Photo by Annie Spratt

IT’S ONLY SIMPLE MATH, BUT I LIKE IT, LIKE IT, YES, I DO

More Paying Customers

Let’s assume a software-as-a-service (SaaS) company spends $100,000 per month on marketing and sales and generates 10,000 monthly website visitors. Let’s further assume that 2% of these website visitors can be converted into 200 leads. Applying a conversion rate of 30% from lead to marketing qualified lead (MQL), from MQL to sales qualified lead (SQL) and from SQL to customer, the 200 leads can be converted into 5 new paying customers.

Lower Customer Acquisition Costs (CAC)

At the same time, the optimized conversion funnel leads to significantly lower customer acquisition costs (CAC). $100,000 spent on marketing and sales will lead to CAC of $20,000 in the original example ($100,000 / 5 new paying customers), $12,500 in the example with a conversion rate improved by 10% ($100,000 / 8 new paying customers) and $9,091 in the example with a conversion rate improved by 20% ($100,000 / 11 new paying customers).

Higher Growth

Since a better conversion rate leads to more paying customers, it also leads to more growth. Assuming an average monthly recurring revenue of $1,000 per paying customer, the new monthly recurring revenues amount to $5,000 in the original example (5 new customers * $1,000 new MRR), $8,000 in the example with a conversion rate improved by 10% (8 new customers * $1,000 new MRR) and $11,000 in the example with a conversion rate improved by 20% (11 new customers * $1,000 new MRR). Correspondingly, the new annual recurring revenues (MRR * 12) amount to $60,000, $96,000 and $132,000 respectively.

Shorter Payback Period

If a company improves its conversion funnel and spends less on acquiring a customer, the payback period gets shorter. In the original example, it takes 20 months to pay back the customer acquisition costs (CAC of $20,000 / $1,000 new MRR).* In the example in which the conversion rate is improved by 10%, the payback period is reduced to 12.5 months (CAC of $12,500 / $1,000 new MRR). In the example in which the company found ways to improve the conversion rate by 20%, the payback period is reduced to 9.1 only (CAC of $9,091 / $1,000 new MRR).

Better Unit Economics

Assuming an average customer lifetime of 48 months and the same monthly recurring revenue of $1,000 per paying customer, the customer lifetime value is $48,000 ($1,000 new MRR * 48 months).*

…Stay tuned for Part II: From Simple Math to Tangible Business Improvements

Now indeed, so far this has only been applied simple math. And whether or not a company can in fact improve the conversion rate and at which stage of the funnel is something that needs to be analyzed on a case-by-case basis. However, stay tuned for Part II in which I explain how to get from simple math to tangible business improvements.

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LeadX Capital Partners

LeadX Capital Partners

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