What is CAC (Customer Acquisition Cost)?
CAC customer acquisition cost refers to the total cost of acquiring a new customer, including marketing, sales expenses, and other associated costs. It is a crucial metric for SaaS (Software as a Service) companies to understand how much they are spending to acquire new customers and how this cost impacts their overall profitability.
Why is CAC important?
- It helps businesses determine if their marketing and sales strategies are cost-effective.
- It plays a crucial role in assessing a company’s overall profitability.
- It influences pricing strategies, marketing budgets, and business scalability.
A lower CAC customer acquisition cost generally indicates efficient customer acquisition, while a higher CAC may signal the need for optimization in marketing efforts.
How to calculate CAC (Customer Acquisition Cost)
Calculating CAC is relatively straightforward. To determine your CAC, you need to divide your total sales and marketing expenses by the number of new customers acquired during a specific period.
CAC = Total Sales and Marketing Expenses / Number of New Customers Acquired
As an example if a company spends €100,000 on marketing and sales in a given period and acquires 1,000 new customers, the CAC would be:
CAC = €100,000 / 1,000 = €100
This means the company spends €100 to acquire each new customer.
What is LTV/CAC Ratio?
Understanding CAC alone isn't enough. It must be analyzed in relation to Customer Lifetime Value (CLV) to determine business profitability. The LTV/CAC ratio compares the lifetime value of a customer to the cost of acquiring that customer. While CAC is an important metric for SaaS companies, the LTV/CAC ratio provides a more comprehensive view of a company's financial health.
LTV/CAC ratio benchmark
Why is LTV/CAC important?
- A high LTV/CAC ratio indicates strong profitability and efficient customer acquisition.
- A ratio below 1:1 suggests that a company is spending more to acquire customers than they are worth, which is unsustainable.
- Investors often assess the LTV/CAC ratio to determine a company’s long-term viability.
But what is a good LTV/CAC ratio? A common benchmark is 3:1—meaning for every €1 spent on acquiring a customer, the company should generate at least €3 in revenue over that customer’s lifetime.
LTV/CAC Calculation
When you know your CAC and CLV, calculating the LTV/CAC ratio is simple. Divide the CLV by the CAC to determine the LTV/CAC ratio.
LTV/CAC Ratio = CLV / CAC
For example, if a company’s CLV is €300 and the CAC is €100, the LTV/CAC ratio would be:
LTV/CAC Ratio = €300 / €100 = 3
This means the company generates €3 in revenue for every €1 spent on acquiring a customer.
LTV/CAC Benchmark Calculator
CAC SaaS: Why is it important?
For SaaS (Software as a Service) businesses, CAC customer acquisition cost is particularly important due to subscription-based revenue models. Unlike traditional businesses, SaaS companies must ensure that the customer remains subscribed long enough to cover acquisition costs and generate profit. Most successful SaaS companies aim for an LTV/CAC ratio of 3:1 or higher, ensuring that each acquired customer brings long-term value.
The easiest way to continually monitor your CAC and LTVCAC ratio is by automating this process. This is often done This is often done using a subscription management software or reporting tool. By using a tool like Fenerum you can easily keep track of your CAC and other important metrics.
