SaaS SaaS Business Models and Pricing 2 — Questions and Answers
Question 1: What is Customer Acquisition Cost (CAC) in SaaS?
- The average contract value of a new customer
- The total sales and marketing spend divided by the number of new customers acquired (Correct answer)
- The cost to onboard and implement the software for a new customer
- The monthly support cost per active customer
Correct answer: The total sales and marketing spend divided by the number of new customers acquired
CAC is the total sales and marketing investment divided by the number of new customers acquired in the same period, measuring efficiency of growth spend.
Question 2: What is the LTV:CAC ratio and what does a healthy ratio look like for SaaS?
- Revenue to cost ratio; healthy is above 1:1
- Lifetime value to customer acquisition cost; a ratio of 3:1 or higher is generally considered healthy (Correct answer)
- Loan-to-value in SaaS financing; 2:1 is standard
- Lead-to-customer conversion; 5:1 is the benchmark
Correct answer: Lifetime value to customer acquisition cost; a ratio of 3:1 or higher is generally considered healthy
LTV:CAC compares the lifetime value a customer generates to the cost of acquiring them; 3:1 is the widely cited benchmark indicating efficient, profitable growth.
Question 3: What is expansion revenue in a SaaS context?
- Revenue from entering new geographic markets
- Additional revenue generated from existing customers through upsells, cross-sells, or seat additions (Correct answer)
- Revenue from acquiring smaller SaaS competitors
- One-time professional services revenue from new implementations
Correct answer: Additional revenue generated from existing customers through upsells, cross-sells, or seat additions
Expansion revenue is incremental revenue from existing customers upgrading plans, adding seats, or purchasing add-ons — a high-margin growth lever that reduces reliance on new customer acquisition.
Question 4: What is a tiered pricing model in SaaS?
- Charging different prices in different countries
- Offering multiple fixed packages (e.g., Starter, Pro, Enterprise) with increasing features and prices (Correct answer)
- Discounting price based on contract length
- Setting price dynamically based on real-time demand
Correct answer: Offering multiple fixed packages (e.g., Starter, Pro, Enterprise) with increasing features and prices
Tiered pricing packages features into distinct plans at different price points, allowing customers to self-select the tier matching their needs and budget.
Question 5: What does 'land and expand' mean as a SaaS go-to-market strategy?
- Expanding into international markets after establishing domestic dominance
- Winning an initial small deal within an organization and then growing the footprint through upsells and additional users (Correct answer)
- Acquiring smaller SaaS companies to expand product capabilities
- Landing enterprise accounts exclusively and avoiding SMB customers
Correct answer: Winning an initial small deal within an organization and then growing the footprint through upsells and additional users
Land and expand starts with a small initial sale (often one team or department), then systematically grows usage and revenue within the account over time.
Question 6: What is a SaaS benchmark for a 'good' annual gross revenue churn rate for a B2B SaaS company?
- Below 30% annually
- Below 10% annually, with best-in-class under 5% (Correct answer)
- Below 50% annually
- Below 20% annually
Correct answer: Below 10% annually, with best-in-class under 5%
Best-in-class B2B SaaS companies target annual gross churn below 5%; anything below 10% is generally considered acceptable, while above 10% signals a retention problem.
SaaS SaaS Business Models and Pricing 2
What is Customer Acquisition Cost (CAC) in SaaS?