What is Customer Acquisition Cost?
Customer Acquisition Cost (CAC) measures the costs of acquiring new customers by adding up sales and marketing costs for a given period, and dividing them by the number of new customers for that period. CAC calculations can vary in regards to the inclusion of variable and fixed (or overhead) costs. SaaS expert Lincoln Murphy talks about “fully loaded CAC”, which includes everything it takes to get a customer on board, from “the cost of advertising, marketing, sales, support during the Free Trial, on-boarding costs, etc” (read Lincoln here). CAC metrics can also be determined on an individual account basis, by breaking down costs more granularly.
How to Calculate Customer Acquisition Cost
To calculate CAC, follow these steps:
- Identify the relevant costs: Determine all the costs associated with acquiring new customers during a specific period. These may include marketing and advertising expenses, sales team salaries and commissions, promotional costs, and any other costs directly related to customer acquisition efforts.
- Calculate the total acquisition costs: Add up all the costs to find the total acquisition costs for the specified period.
Total Acquisition Costs = Marketing Costs + Advertising Costs + Sales Team Costs + Promotional Costs + Other Acquisition-related Costs
- Determine the number of new customers: Count the number of new customers acquired during the same period as the costs were incurred. Ensure that you only include customers who were directly influenced by your acquisition efforts.
- Calculate Customer Acquisition Cost: Divide the total acquisition costs by the number of new customers to find the CAC.
Customer Acquisition Cost (CAC) = Total Acquisition Costs / Number of New Customers
Customer Acquisition Cost (CAC) Example
Consider a SaaS company that spent $125,000 on sales and marketing in a month, including salaries, commissions, ad spend and trial support. 50 new customers were signed up during the same month. In this case:
CAC = $125,000/50
Customer Acquisition Cost (CAC) Benchmarks
A number of factors should come into play in determining a target CAC, including Customer Lifetime Value projections, market size, business life cycle stage, level of funding, competitive positioning and marketing strategy. In effect there are no specific SaaS industry or sector benchmarks for Customer Acquisition Cost. Here’s some expert advice and rules of thumb:
- A general rule of thumb Skok suggests is that CAC should be repaid through customer profits within 12 months (CAC should be less than 12 months MRR).
- A CAC of 6-12x the monthly software subscription fee is acceptable, generally speaking.
- Strong B2B companies in their growth stage should have a ratio of LTV:CAC of 3-5, according to Mike.
- According to an annual SaaS company survey conducted by Pacific Crest Securities, an investment banking firm, in 2015 SaaS companies that are primarily focused on internet sales are spending 42 cents to acquire every dollar of annual contract revenue; SaaS companies focusing primarily on channel sales are spending 66 cents, those focusing on inside sales 90 cents, and field sales $1.14.
Customer Acquisition Cost (LTV) Challenges
Measuring and optimizing the CAC metric can be challenging on a number of fronts, especially if you’re attempting to attribute acquisition costs to individual accounts or customer segments - how much of your monthly ad spend or sales budget should be attributed to a specific win?
Even at the aggregate level, adding up marketing and sales costs over a given period can be misleading from a CAC perspective; in most cases marketing and sales resources are not solely focused on new customer acquisition.
Customer Acquisition Cost (CAC) Best Practices
Following best practices for measuring, monitoring and optimizing Customer Acquisition Cost can help you grow your SaaS business profitably. Here are a few tips and best practices:
- Have different target CACs for different customer segments; not all customers are created equal, and you can afford to spend more acquiring more profitable customers.
- Keep spending as low as possible when you’re starting out; you can’t buy your way into a repeatable, scalable business model.
- Consider your strategic objectives and life cycle stage when determining a target CAC. Are you out to capture market share? Exploit first mover advantages? Undercut a specific competitor?
- Account for funding; what is your burn rate? How long is your runway? You may be able to afford higher customer acquisition costs early on if you are well funded.
- Keep CAC considerations and metrics to yourself; don’t burn bridges or ruin relationships because a customer is taking up more time or resources than you thought they would.
How to monitor Customer Acquisition Cost in Real-time
Once you have established metrics for measuring Customer Acquisition Cost (CAC), you’ll want to establish processes to monitor this and other SaaS KPIs on a continual basis. Dashboards can be critical in this regard.
To better understand the efficiency of your customer acquisition efforts, it's essential to analyze the LTV to CAC ratio. This ratio compares the lifetime value of a customer (LTV) to the cost of acquiring that customer (CAC). A higher LTV to CAC ratio indicates that your company is spending less to acquire customers who bring more value to the business.
Learn more about how to track your CAC on a SaaS Dashboard.
Customer Acquisition Cost: Top Resources
SaaS Customer Acquisition Best Practices, David Skok
4 SaaS Customer Acquisition Best Practices, David Skok
Quora conversation thread: What is the typical acquisition cost of a SaaS customer by monthly multiple?, (response by) Mike Volpe, former CMO at Hubspot
The 6 Marketing Metrics Your CEO Actually Wants to See, Mike Volpe, former CMO at Hubspot
What’s Your Real Customer Acquisition Cost, Carlos Eduardo Espinal, Seedcamp
Startup Killer: The Cost of Customer Acquisition, David Skok
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