Customer Acquisition Cost (CAC)

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What is Customer Acquisition Cost?

Customer Acquisition Cost (CAC) is the cost a business incurs to acquire a new customer. This includes the fully loaded costs associated with sales and marketing to attract a potential customer and to convince them to purchase.

Alternate names: Cost Per Acquisition

How to calculate Customer Acquisition Cost?

ƒ Sum(Sales Costs + Marketing Costs) / Count(New Customers)

Example

Consider a SaaS company that spent $100,000 on sales, marketing, salaries, trials, and commissions in a month and this expense resulted in 50 new customers, Customer Acquisition Cost would be;

CAC = $100,000 / 50 = $2000

More about this metric

CAC is a fundamental metric and is important to measure not only in aggregate, but also for each market segment or territory you sell into. Knowing CAC, and calculating it alongside other income metrics, allows you to assess which segments are most efficient and profitable.

Customer Acquisition Cost (CAC) is the total cost of acquiring new customers, which is calculated by adding up sales and marketing costs and dividing them by the number of new customers for a specific period. 

This metric represents one of the most important KPIs for investors. It is used to understand the scalability of a business and evaluate the company’s profitability. It is also important to look at CAC in the context of the lifetime value of a customer (LTV). These metrics together are key indicators of return on investment.

Typically businesses want to reduce CAC. CAC can be reduced by improving conversion rates and increasing the number of customers acquired. However, if you are in a growth phase, you may be increasing CAC for a period of time.

CAC is measured by the total spend on sales and activities divided by the number of customers acquired and attributable to that spend. To simplify this, often companies will offset the costs and the resulting wins by the average duration of their sales cycle.

When applied to Customer Lifetime Value (LTV), businesses ideally want LTV to CAC ratio (LTV:CAC) to be over 3 and CAC payback in under 12 months.

Additional Customer Acquisition Cost recommended resources

Startup killer: CAC. By David Skok Don't break the bank on sales and marketing. By Jason Lemkin

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