What Is a Good CAC? How To Calculate and Reduce Customer Acquisition Cost

Let’s talk about what CAC is, how to calculate it, why it’s important, and how you can reduce your customer acquisition cost.

What is customer acquisition cost (CAC)?

Your customer acquisition cost (CAC) measures how much money you need to spend to acquire a new customer. This is a key metric for subscription businesses because it can help you develop (or refine) your pricing strategy, ensuring that you make more revenue than it costs to acquire new customers.

In order to determine your company’s profitability and efficiency, you’ll have to compare your CAC with your customer lifetime value (LTV). This metric determines the amount of money a customer will bring to your company from the moment they sign up till they cancel their subscription. As a general rule, LTV should be at least three times higher than your CAC in order for your business to be profitable.

How do you calculate customer acquisition cost?

To calculate your SaaS company’s customer acquisition cost, choose a period in which to measure the total cost of sales and marketing. Then, you'll divide it by the total number of customers acquired over that same period.

How to calculate CAC: CAC = (marketing + sales expenses) / # of new customers

As you can see, you really only need two metrics to work this equation — total cost of sales/marketing and the number of new customers acquired. For sales and marketing costs, make sure you’re including salaries, tools, and spend. Essentially, anything that’s on your P&L that’s contributing to customer acquisition should be included when you’re totaling up your sales and marketing costs.

So, for example, let’s say you spent $36,000 on sales and marketing and you ended up acquiring 1,000 new customers. In this case, your CAC would be $36 per customer.

Why is customer acquisition cost so important?

Much like other SaaS metrics, your customer acquisition cost is both a reflection of the potential future success of your company and a tool you can leverage to meet your company goals. Once you’ve calculated your customer acquisition cost, there are a few ways you can analyze this number and use it to improve the health of your company.

Optimize your LTV/CAC ratio

Earlier we mentioned the important connection between customer LTV and your CAC. In order to have a successful SaaS business model, you’ll need your CAC to be sufficiently lower than your customer LTV. As a benchmark, you should try to optimize your LTV/CAC ratio to net out to at least three (or higher). That means for every dollar you put into customer acquisition, you’re getting three out. Each quarter, you should try to manage that ratio and, if necessary, improve it by optimizing your sales and marketing strategies and tactics.

Determine and optimize your payback period

We’ve talked about the importance of the LTV/CAC ratio, but that doesn’t paint the entire picture. There’s a another element that needs to be considered: your payback period.

The payback period is the rate at which you can get cash from your paying customers. It’s important because we already know that the second you acquire a new customer, you’ve instantly lost money. You obviously want to make that money back as quickly as possible. Hence, the payback period.

Your payback period dictates how quickly you can reinvest in your business and ideally is a component of how you calculate CAC. Put simply, payback periods matter because, for a successful business, cash flow matters. Better to have money now that lets you scale and grow more quickly than it is to have money five years from now.

How can you reduce customer acquisition costs?

Now that you’ve learned about the details and importance of customer acquisition cost and calculated your SaaS company’s CAC, it’s time to consider… what do you do if your customer acquisition cost is too high? Let’s talk about a few strategies you can use to potentially reduce your customer acquisition cost.

Target the right audiences

If you want to reduce your CAC, then you need to make sure you’re optimizing your sales and marekting spending. And, in order to do that, you need to focus on the right audiences. Make sure you’re taking the time to research and assess the niche audience that will be most profitable for you within your specific market so that you can define your ideal customers before you target them.

Improve your sales funnel

An effective sales funnel is the method through which a company guides customers from being leads to becoming paying customers. Sales funnels are essential when you’re trying to reduce customer acquisition costs. A great sales funnel provides ample information and can offer you insight into the thoughts of its potential customers. By quantifying each step of the process and improving your sales funnel, you can reduce your CAC.

Optimize your pricing strategy

The right pricing model is central to any SaaS business, and it can be helpful when it comes to reducing your customer acquisition cost. As we discussed earlier, your payback period is an important element of your CAC. And an effective pricing strategy can help you shorten that payback period and recoup your losses more quickly after acquiring new customers. Optimize your pricing by centering it around a value metric — this means that you charge customers more as they receive more value from your product.

Focus on retention

It may not be as flashy or exciting as drawing in brand-new customers, but focusing on the customers you already have can be much more impactful to the long-term growth of your company. After all, at least 65% of a company’s business comes from existing customers. And we know that it costs 5x more to acquire new customers than it does to keep existing ones.

Focusing on the customers you already have and reducing your churn is one of the best ways to ensure solid growth for your SaaS company long-term. And the best way to keep retention rates high is with Churnkey.

With Churnkey, you can identify and stop churn before it occurs. Sound helpful? Sign up for a free trial and see how firsthand Churnkey is helping subscription businesses retain up to 51% more customers.

Customer acquisition cost FAQs

How do you calculate CAC?

In order to calculate your SaaS company’s customer acquisition cost, simply take the total cost of sales and marketing from a given period and divide it by the total number of customers acquired over that same period.

Why does CAC matter?

Much like other SaaS metrics, your customer acquisition cost is both a reflection of the potential future success of your company and a tool you can leverage to meet your company goals. CAC can be a useful indicator to monitor for insights into the effectiveness of various sales and marketing strategies.

Which metrics should you include when calculating CAC?

You really only need two metrics to work this equation — total cost of sales/marketing and the number of new customers acquired. For sales and marketing costs, make sure you’re including salaries, tools, and spend.

What is a good CAC?

The ideal CAC will vary between company to company. When it comes to the SaaS industry, CAC is most accurately evaluated when it’s compared to customer lifetime value (LTV). A good LTV/CAC ratio for SaaS companies is generally accepted to be 3:1.