Customer Acquisition Cost (CAC)

Customer acquisition cost (CAC) is the cost a business spends on average to acquire one new customer.

CAC is an important metric for SaaS businesses to understand, particularly as they look to accelerate revenue growth.

This is a metric that I didn’t fully understand when I first started in tech sales. Now I run sales and marketing at a venture-backed B2B SaaS company, and we use CAC to guide our go-to-market initiatives across multiple channels.

My goal with this article is to answer the following questions for you:

What is Customer Acquisition Cost (CAC)?
Why does CAC matter?
How to calculate CAC?
What’s a good CAC?
How do you lower CAC?

Why does CAC matter?

CAC is a useful metric to track, even if you’re feeling confident with your current level of growth today. As a business scales and expands, it’s important to keep a close eye on how much each new customer is costing you and how quickly you can recover your acquisition cost to be profitable (i.e Payback Period).

Although CAC may seem like an abstract concept at the moment, the more closely you can understand the costs associated with acquiring new customers—whether they be through advertising or other means—the better equipped you will be in making smart business decisions down the road.

Understanding CAC will help you allocate resources efficiently, improve return on investment and increase profitability.

CAC was always confusing for me because I didn’t know what costs to include in the calculation.

While there are general guidelines of how to calculate CAC, it can be different for each business. And that’s because each business is different. Teams and resources are structured differently, and so resources may not be fully attributable to acquiring new customers versus servicing existing customers. You need to look at your business to determine which expenses are truly attributed to acquiring new customers.

How to calculate CAC?

If you're working with an existing company that's already had some success gaining customers, you'll need to do some research on what expenses are attributable to acquiring new customers.

You will need to know the following information to calculate CAC:

Period: Choose a time period that matters to you. You may want to calculate this on a monthly, quarterly or annual basis. If you have the data in a spreadsheet, it’s easy to calculate CAC for all three periods. Companies will often focus most on the period that aligns with their average sales cycle. For example, let’s say marketing spends their entire annual marketing budget of $1 million dollars on advertising campaigns in Q1. Then assume your average sales cycle is 3 months. If you looked at CAC on a monthly basis for Q1, you would likely have a very small number of new customers to show for it because they won't convert until Q2, making your CAC extremely high. Start by choosing the right period (Monthly, Quarterly, Annually).
Total Marketing Expenses: Add up every marketing expense from salaries, benefits, contractors, tools and paid advertising campaigns from your chosen period.
Total Sales Expenses: Add up every sales expense from salaries, benefits, commissions, spiffs, contractors and tools.
Total New Customers: Add up the total number of new customers acquired during that same time period.

Here is a simple example of how to calculate Customer Acquisition Cost (CAC):

Let’s calculate a hypothetical CAC for Q1 (Jan, Feb and March and assume the following:

Total Marketing Expenses (salaries, benefits, contractors, tools and paid advertising campaigns):

Jan = $300,000
Feb = $350,000
Mar = $400,000

Total Sales Expenses (salaries, benefits, commissions, spiffs, contractors and tools):

Jan = $150,000
Feb = $175,000
Mar = $200,000

Total New Customers

Jan = 30
Feb = 45
Mar = 50

Customer Acquisition Cost (CAC)

Jan = $300,000 + $150,000 = $450,000 Total Expenses / 30 New Customers = $15,000 CAC
Feb = $350,000 + $175,000 = $525,000 Total Expenses / 45 New Customers = $11,666 CAC
Mar = $400,000 + $200,000 = $600,000 Total Expenses / 50 New Customers = $12,000 CAC
Q1 = $1,575,000 Total Expenses / 125 New Customers = $12,600 CAC

Now, the above calculation is simplified, but will work for most SaaS businesses to make intelligent decisions. Where it can get complicated is if you start attributing parts of resources to CAC. For example, if you offer a free trial that helps to acquire customers, do you attribute server costs to CAC? If your sales reps spend 50% of their time on new customers and 50% on existing customers, do you only allocate 50% of their salary and benefits to CAC?

These questions require an internal conversation with executives from your team. The most important thing is to clearly define how you will define CAC, document it, and then ensure all stakeholders are calculating CAC the same way.

Then when you measure CAC against Lifetime Value (LTV), you can use this information to evaluate your sales and marketing strategy and determine how much you're spending and whether to invest more money to drive growth.

What’s a good CAC?

The average customer acquisition cost varies by industry. You might be wondering how much the average customer acquisition cost varies by industry. Well, it depends on who you ask and which metric they're using. Data shows on average that B2B companies spend a lot more than B2C companies on acquiring new customers.

Many factors affect CAC, including the following:

Marketing spend (how much you're spending on marketing campaigns)
Sales spend (how much you pay your sales reps and on resources for them)
Cost per lead (how much it costs to generate a lead)

How do you lower CAC?

I used to think the company that has the lowest CAC is doing the best, but that’s actually not true.

In fact, the company that can pay the MOST to profitably acquire new customers is better suited to win the market. That means that they can spend more money up front to acquire new customers than their competitors because their customers will ultimately pay them more.

That's the best. You can then outspend your competition on advertising channels. You can pay your employees more. You can offer them lavish benefits. That really is the best.

Either way, you will likely benefit by working to lower your CAC. Think about the variables in the numerator of the equation:

Salaries: can you hire lower cost employees to do the job?
Benefits: can you find more affordable benefits providers?
Contractors: can you hire more affordable contractors vs. full time employees?
Sales Reps: can you have fewer sales reps that are more productive?
Tools: can you reduce the number of tools you’re using or negotiate better deals?
Advertising: can you write better copy and design better creative to drive conversions?

Use the Sales Forecast Template to build your growth plan and measure your CAC. It will help you hit your growth goals with more clarity and predictability.