Customer Acquisition Cost (CAC)
Customer Acquisition Cost (CAC) is the cost related to acquiring a new customer. In other words, CAC refers to the resources and costs incurred to acquire an additional customer. Customer acquisition cost is a key business metric that is commonly used alongside the Customer Lifetime Value (CLTV) metric to measure the value generated by a new customer.
Customer Acquisition Cost = (Total cost of sales & marketing) / (Total # of Customers).
Importance of CAC?
The challenge of CAC is: Spending the right amount to drive new customers to your service without jeopardizing the Customer Lifetime Value (CLTV) and revenue from that customer. This is known as the LTV/CAC ratio, and it's the "god metric" of many successful SaaS companies.
Customer acquisition cost is a direct reflection of the future success of your SaaS business. Most SaaS companies put forth a lot of time and money before they ever see a return on that investment. This metric will begin to matter more and more as time passes and you begin to add up the months it takes to recover from CAC and actually turn a profit.
The graph above depicts the early period of the acquisition process (highlighted in red) where your SaaS business is spending time and money. Then as time passes your customer starts to pay monthly for your subscription service and you eventually break even and make your money back on the initial investment.
Here are some of the key reasons for understanding CAC:
Improving Return on Investment (ROI): Understanding the cost to acquire new customers is crucial to analyzing marketing return on investment. By using CAC, a company is able to determine the most cost-effective way to acquire customers. For example, let’s say you are running two ads (Ad1 & Ad2) to attract customers. Both ads attract 100 clicks and you acquire 10 customers from both ads. But CPC of Ad1 is $2 and for Ad2 is $5.
CAC for Ad1 will be $20 and Ad2 will be $50.
The result indicates that you should shift more towards Ad1 for marketing your product.
Determining and optimizing your payback period: As soon as you acquire a new paying customer you instantly have lost money. This means the first thing on the agenda moving forward should be getting that upfront money back as soon as humanly possible. Think of the payback period as the next layer of CAC in the fact that it reveals a much more dense look at how your channels and business as a whole are doing from an acquisition front, especially if you're employing a freemium model.