Customer acquisition cost (CAC)

Customer acquisition cost (CAC)

Customer acquisition cost describes the total amount you spend to acquire a customer, including all marketing and sales expenses like salaries, headcount-related fees, charges for running ads, creating content, technical costs, etc. To get a decent understanding of whether your company will fail or succeed, compare your customer acquisition cost to the customer lifetime value. A good rule of thumb is to have a CLV to CAC ratio of 3:1. If this ratio is closer to 1:1, that means you are not making any profit on customers. If it is closer to 5:1, think about ways to invest in new opportunities to get more customers and not miss out on new marketing opportunities.
Since there are various marketing channels to get new customers, monitor the costs for each of your marketing channels and find the one with the lowest CAC and the highest return. A great framework to reduce your marketing efforts and to let you focus on marketing channels that can get meaningful results is the Bullseye Framework. When you constantly reduce your customer acquisition cost, you will see higher profits and be able to invest in new marketing opportunities to speed up growth.

How to calculate the CAC

Calculate the customer acquisition cost by dividing all marketing and sales expenses by the number of new customers acquired in the period you spent the money.

Customer acquisition cost = Cost of marketing and sales / Number of new customers acquired (in the same period).

For example, if you spend €200 on marketing and sales in a month and acquired 50 new customers in the same month, your CAC is €4 (€200 / 50).

How to reduce your CAC

• Inbound marketing
• Referral programs / Word-of-mouth
• Improve the conversion rate for your service (website, app)
• Add additional value to your service
• Build strong ad-campaigns
• Use marketing automation
• Optimize your sales funnel

Months to recover CAC

SaaS companies rely on a monthly or a yearly retainer customers pay to use the service. This results in an enormous investment upfront to gain customers initially. SaaS is a great business model because you don’t have to start your sales from zero every month. However, if it takes you too long to get your money back, which you invested in acquiring customers, you will have a hard time.

As we already discussed, the customer acquisition cost is one of the prime metrics that will decide your business fate. If you pay more to acquire a customer than your customer lifetime value, you will not stay in business for long. To get a decent understanding of whether your company will fail or succeed, compare your customer acquisition cost to the customer lifetime value. A good rule of thumb is to have a CLV to CAC ratio of 3:1. If this ratio is closer to 1:1, that means you are not making any profit on customers. If it is closer to 5:1, think about ways to invest in new opportunities to get more customers and not miss out on new marketing opportunities. With that being said, it is vital to know how long it will take you to recover your initial customer acquisition cost and when you are breaking even. The metric also gives insights into how much cash you need upfront to sustain the business while trying to get to the break-even point. As time passes by, the risk of churn increases, and it is unlikely that customers stay with you forever. That’s why a short payback period helps you to reach the break-even point more quickly and enables your business to grow.

How to calculate months to recover CAC

Calculate the months to recover CAC by dividing customer acquisition cost by average revenue per account multiplied by gross margin.

Months to Recover CAC = CAC / (ARPA * GM%)

For example, you spend €1000 to acquire a new customer. This customer pays a monthly fee of €100, which results in a gross margin of €80 per month (80%). It would take you 12,5 months to recover the initial €1000 you invested in getting the customer. If the customer churns before that 12,5 months, this will cause a loss.

How to reduce months to recover CAC

• Increase your prices
• Reduce customer acquisition cost by finding new and more effective marketing channels
• Reward people to upgrade to higher plans
• Focus on expansion revenue through up-sells and cross-sells
• Experiment with pricing plans
• Reward people to use annual contracts

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