What is CAC and how do I calculate it?

Almost every company on the planet has to market and advertise their services if they want to acquire customers. The cost of this outreach is known as customer acquisition cost, or CAC, and it’s a critical metric that companies (especially SaaS) can use to determine how effective their marketing strategies and advertising campaigns are. 

Our CAC calculator is a helpful tool to make crunching the numbers faster and easier than doing it by hand—and it can help you quickly compare different metrics and look at your data from every angle:

Customer acquisition cost, aka CAC, is the amount of money you spend on attracting new customers. It tells you how profitable your sales and marketing efforts are.

Paid CAC looks at the expenses associated with paid advertising and helps you identify the most and least profitable channels.

Blended CAC looks at the whole picture—both direct and indirect costs associated with customer acquisition—to get closer to the actual costs of gaining new customers.

CAC payback period is how many months of customer payments it will take to recoup the cost of obtaining that customer.

CAC:LTV ratio looks at the lifetime value of a customer in relation to how much it costs to acquire that customer.

Just plug the numbers in above to calculate your CAC or keep reading for more details on CAC.

What is your CAC trying to tell you?

Calculating and understanding your CAC is crucial for making sound decisions about where to focus your marketing spend. It’s also an important indicator of the current and future success of your company. The idea is to understand how quickly you can afford to acquire new customers and ensure you make more money over the lifetime of the relationship than you spend to attract them. 

A company's ability to acquire new customers at a reasonable cost is a critical performance indicator. When you know how much it costs to bring in a new customer, you can better evaluate the success of your advertising campaigns and decide where to focus your efforts.

Two ways to look at CAC: paid and blended

There are two ways to calculate CAC—paid and blended. The calculation you should use depends on your business's objectives and the details of your desired CAC analysis (and many companies will want to use both).

Paid CAC helps you evaluate the expenses directly associated with advertising, like paid social media campaigns and referral programs. It helps you identify which marketing channels have issues that need to be addressed and which channels provide the best ROI.

By contrast, blended CAC considers both direct and indirect costs, like salaries and commissions, which many companies tend to overlook. Blended CAC offers a more robust picture of the actual cost of gaining a customer. It accounts for all your different marketing channels, whether they’re paid or not, and it gives you a high-level snapshot of your business’s acquisitions.

How to calculate CAC  

The customer acquisition cost is determined by totaling all relevant expenses incurred over a given period to bring in new customers and dividing that figure by the total number of new customers gained over the same time frame. Here is the formula used to determine CAC:

CAC = Total Sales & Marketing Expenses / New Customers Obtained

Imagine a SaaS company invested $50,000 in advertising and promotion during a single month, and as a result, it gained 100 new clients. For that month, the CAC would be:

Advertising and promotion costs = $50k / 100 = $500 Per Customer

The CAC payback period 

The CAC payback period is the length of time it takes to break even—i.e., how long it will take to earn income from a client that is equal to the amount of money you spent acquiring that client. The CAC payback period helps you track, monitor, and evaluate any changes you’ve made to your marketing strategy as well as the effectiveness of your customer retention programs. 

Knowing the return on your CAC can help you see where you’re overspending, identify how you can improve pricing, and determine why customers may be churning before the end of the payback period. Overall, it’s a helpful metric for deciding where to spend your advertising money and how to build your firm sustainably.

CAC payback is easy to determine: Simply divide your CAC by the monthly average revenue per client x your gross margin. The result is the number of months it will take to make a profit once you spend the money. The ideal payback period will vary by industry, but the shorter the better. The longer the payback period, the longer it will be before the customer is profitable for your business.

A low CAC payback period reflects a lower cost of acquiring new customers while still generating a profit. Keeping an eye on your payback period over time will allow you to see patterns and make the most of your marketing and sales initiatives.

The CAC:LTV ratio: what it is and how to calculate it

It’s possible for a business to determine whether its sales and marketing activities are profitable by calculating its CAC and then comparing it to the customer’s lifetime value (LTV). LTV is the total amount they are likely to spend on a business's goods and services throughout their relationship with the company. If the CAC exceeds the LTV, you’re spending more for customers than you’re likely to ever make back, and something needs to change. 

How to Calculate LTV

To determine the lifetime value of a customer:

LTV = (ARPU x GM) / Revenue Churn Rate

Where:

ARPU = Average Revenue Per User (or customer)

GM = Gross margin, the amount of money made from customers after subtracting the cost of goods sold and any other related expenses.

Revenue Churn Rate = (Revenue lost in a specific period – upsells in that specific period) / revenue at the beginning of the period.

How to calculate the CAC:LTV ratio

To calculate the CAC:LTV ratio, divide the LTV by the CAC. For example, if your average customer spends $100 per transaction, makes two purchases per year, and stays with you for three years on average, their lifetime value (LTV) will be $600. If your cost to acquire that custom is $100 your ratio looks like this:

LTV:CAC = $600/$100 = 6

While it’s useful for showing you whether your marketing is profitable, the CAC:LTV ratio doesn’t offer much direct insight into specifics you may want to address, such as whether your new referral program is working or your content marketing strategy is converting.

The CAC:LTV ratio is most helpful for businesses that have been around for a while. The more years of information you have to work with, the more precise the ratio will be and the better the  decisions you base on it will be.

CAC:LTV vs. CAC Payback: Which is best?

Both of these metrics have value. The “best” one depends on the insight you’re looking for to better sustain and grow your business.

CAC:LTV is best for getting a general sense of your overall marketing success—is it profitable, or not? Since CAC:LTV is calculated using averages, it’s most accurate for established businesses with several years’ worth of data to work with. 

CAC Payback is a more accurate and detailed look at your marketing efforts, including marketing campaigns and customer retention programs. CAC payback is a snapshot that requires less data and can provide more insight into critical business decisions when you're a newer company. Just make sure you factor in your gross margin when you measure CAC payback, as gross revenue or MRR will give a misleadingly fast payback.

Fueling your growth

The cost to acquire a new customer is a key performance indicator for any SaaS organization that wants to know how effective their marketing and sales strategies are. Whether you’re a SaaS startup, a growing company in any industry, or looking to scale, knowing how much you’re spending on acquiring new business helps you make better resource allocation decisions and hone your sales and marketing strategies.

With a solid strategy in place to acquire customers, Pipe can give you fast, frictionless access to capital to fuel your marketing and sales efforts and help you grow.