Customer Acquisition Cost (CAC) is what it costs your business to gain a new customer. In other words, CAC is what it costs your business to convince an interested party to buy your product or service.
It takes into account all costs — across sales and marketing, associated with acquiring new customers.
CAC is an important consideration for your pricing strategy. CAC is also used by investors to determine the growth and profitability profile of a startup’s business model. Startups with a high CAC, typically, require more capital to sustain while they acquire new customers.
Whether a CAC is considered low or high depends on how it compares to the amount each customer will pay for your product (hence the connection to pricing strategy). A universal premise is that customers must pay more for your product than it costs you to find and convert them into customers in the first place.
In essence, CAC is closely linked to pricing and growth strategy and therefore, a crucial SaaS metric.
How to calculate CAC?
CAC is calculated for a certain period, such as a month or a quarter. This is because CAC can vary hugely over time, depending on the marketing budget for a given period and the success of a campaign to acquire new customers. For example, a discount offer launched in a quarter may result in a higher-than-usual new customers, which in turn affects CAC for that quarter.
To calculate CAC, add up all sales and marketing costs associated with acquiring new customers in your selected period and then divide this total figure by the number of new customers acquired during the same period.
As a formula, CAC can be shows as:
What costs go into calculating CAC?
Here are a few of the most prevalent sales and marketing costs that must be included while arriving at your CAC:
Costs of your marketing team (e.g. salaries)
Costs of your sales team (e.g. salaries, commissions)
Advertising costs (e.g. Facebook ads, print ads)
Creative costs
Production costs (e.g. publishing costs)
Distributions costs (e.g. conference costs, PR costs)
Typical pitfalls when calculating CAC
The two main pitfalls to watch out for when calculating CAC are —
Incomplete list of sales and marketing costs and inconsistency in including these costs while calculating CAC.
Incomplete lists of sales and marketing costs: Not clearly identifying all the sales and marketing costs ranging from salaries, travel, ad budgets to events and promotional materials is one of the main reasons for startups to have incorrect or fluctuating CAC. When defining costs for acquiring new customers, be sure to also consider overhead costs such as laptops and phone contracts.
Inconsistency in tracking costs: Inconsistency in tracking these costs is another pitfall. It is crucial to be consistent with cost items that are included in calculating CAC. Inconsistent input such as including costs for attending a trade show but leaving out costs of a conference will result in an inaccurate CAC. Lastly, it is critical to only include costs related to new customers, not activity related to existing customers (e.g. upsell promotions).
Is there an industry benchmark for CAC?
It is impossible to benchmark CAC because it varies significantly by your industry, stage and size of the business, your product proposition and the market that you operate in. Instead, you’ll find that payback period (length of time in which you can recoup your CAC from customer payments) is widely used as a yardstick to evaluate CAC.
For early-stage B2B businesses, a payback period of 10-12 months is considered a good benchmark.
To learn more about SaaS KPIs that matter, check out our Ultimate Guide to Top 5 SaaS KPIs that investors care about.
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