Customer Acquisition Cost Ratio (CAC Ratio)
Date created: Mar 15, 2021 • Last updated: Mar 15, 2021
What is Customer Acquisition Cost Ratio?
CAC Ratio is a measure of sales and marketing efficiency.
Formula
How to calculate
A company sells $500K of subscription bookings during the current quarter at a subscription gross margin of 80%. The prior quarter, they invested $400K in sales and marketing expense. Their CAC Ratio is (500K * .8) / 400K or 1. $1 of subscription gross profit was generated for each dollar of sales and marketing investment. Because sales and marketing investment takes time to drive bookings, it’s recommended to lag the Sales and Marketing costs by 1 quarter in your calculation.
Customer Acquisition Cost Ratio
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What is a good Customer Acquisition Cost Ratio benchmark?
A CAC ratio of around 1 is considered a healthy benchmark.
More about this metric
The literal interpretation of CAC Ratio: for one dollar of sales and marketing investment, how much new subscription contract value can my company generate? We adjust the ratio for the gross margin to reflect how efficiently the company delivers their SaaS offering. CAC Ratio can reflect the choice a company makes between growth and profitability. If a company chooses to grow quickly, hire more salespeople, invest in marketing, they will naturally be less profitable and pull down their CAC Ratio. If they choose to slow the hiring of salespeople (fewer people on ramp) and reduce investment in marketing, their CAC Ratio can increase. The optimal CAC Ratio for your business will depend on your market context: macro growth rates, competitive intensity, and end-customer health all can impact how efficiently you are able to sell your product.
