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Customer Acquisition Cost (CAC)

What is Customer Acquisition Cost (CAC)?

The customer acquisition cost (CAC) is the cost of acquiring new customers through different channels. This includes all costs associated with identifying, targeting, and acquiring new customers. For a software as a service (SaaS) company, these costs can consist of online advertising, lead generation, sales salaries, and commissions. The CAC can be divided into two categories: customer-related costs and product-related costs. 

The customer-related costs are the costs associated with acquiring new customers, such as online advertising, lead generation, and sales salaries. The product-related costs are the costs associated with developing and delivering the product, such as engineering and customer support. 

Why is Customer Acquisition Cost Important?

CAC is important because it provides a benchmark for how much it costs to acquire new customers. This can help businesses track their marketing and sales efforts to see if they are efficient and effective in acquiring new customers. Additionally, CAC can be used to compare the costs of acquiring new customers across different channels or marketing campaigns.

Investors can use it to assess the potential profitability of a business. A business with a high CAC may need to generate a lot of revenue from each new customer to be profitable. As such, businesses with a high CAC need to have a clear and concise plan for how they will generate revenue from new customers.

CAC can help businesses track their customer lifetime value (CLV). CLV is the total value a customer will bring to a business over their relationship. By understanding CAC and CLV, companies can make informed decisions about where to allocate their resources to generate the most value from new and existing customers.

Finally, CAC is important because it can help businesses benchmark their performance against other industries. By understanding the average CAC for businesses in their industry, businesses can see where they fall in customer acquisition costs. This information can help businesses make strategic decisions about improving their marketing and sales efforts to compete better against their peers.

How to calculate Customer Acquisition Cost?

There are a few ways to calculate customer acquisition costs. The most common and accurate method is dividing your total marketing and sales spend by the number of new customers, and this will give you your customer acquisition cost.

To calculate your customer acquisition cost, you need to know your total marketing and sales spend, which includes advertising, sales salaries, commissions, and other marketing or sales expenses. Once you have this number, divide it by the number of new customers acquired, and this will give you your customer acquisition cost.

For example, let's say you spend 1,00,000 on marketing and sales and acquire 100 new customers, and your customer acquisition cost would be 1,000.

To get more accurate, you can break down your marketing and sales spend by channel and calculate the customer acquisition cost for each channel. This will give you a better idea of which channels are more effective at acquiring new customers.

Industry Benchmarks

There is no one-size-fits-all answer to the Industry Benchmarks, as the customer acquisition cost (CAC) for a software-as-a-service (SaaS) company will vary depending on the specific industry and business model. However, as a general rule of thumb, SaaS companies should aim to keep their CAC below three times their customers' lifetime value (LTV).