What is Customer Acquisition Cost (CAC)?
Customer Acquisition Cost (CAC) is the total amount of money a business spends to acquire a new customer. It encompasses all efforts required to introduce a prospect to your product and convert them into a paying user, including marketing campaigns, advertising, sales team salaries, and software tools.
How to Calculate CAC
To calculate your CAC, simply divide all costs spent on acquiring more customers (marketing expenses + sales expenses) by the number of customers acquired in the period that money was spent.
CAC = (Marketing Spend + Sales Spend) / New CustomersFor example, if you spent $5,000 on Facebook ads and $2,000 on sales outreach in a month, and acquired 50 new paying customers, your CAC would be $140 per customer.
Why Track CAC?
- Determine Profitability: By comparing your CAC to a customer's Lifetime Value (LTV), you can quickly determine if your business model is sustainable.
- Optimize Marketing: Understanding your CAC allows you to evaluate which marketing channels are the most cost-effective and where to double down.
- Calculate Payback Period: Knowing your CAC is the first step in calculating how long it takes for a customer to become profitable for your company.
Frequently Asked Questions
What is a good LTV:CAC ratio?
For SaaS companies, the industry standard for a healthy LTV:CAC ratio is 3:1 or higher. This means that for every dollar you spend acquiring a customer, they generate three dollars in lifetime value. A ratio of 1:1 means you are losing money, while a ratio of 5:1 or higher might indicate you are under-investing in marketing.
Should CAC include employee salaries?
Yes. A true "Fully-Loaded CAC" should include all costs associated with acquisition. This includes marketing spend, advertising budgets, software tools, and the salaries of both your marketing and sales teams.
What is the CAC Payback Period?
The CAC Payback Period is the number of months it takes for a customer's subscription revenue to cover the cost it took to acquire them. In SaaS, a payback period of 12 months or less is generally considered excellent.