CAC — Customer acquisition cost
CAC is what it costs to win a new customer: all marketing and sales spend in a period divided by the customers won in that same period. It includes salaries, tools and advertising, not only the ad budget.
What is customer acquisition cost?
CAC is what it costs to win a new customer: all marketing and sales spend in a period divided by the customers won in that same period. It includes salaries, tools and advertising, not only the ad budget.
Also: CAC · acquisition cost
With salaries included
A CAC counting only ad spend comes out beautiful and decides nothing. If half a person spends their time on acquisition, that half salary is acquisition cost. It is the difference between a number that reassures and one that informs.
Why it matters
What changes in a SaaS
Because set beside the value of a customer it says whether the business holds together. And because it sets how much can be invested in growth: a CAC recovered in four months lets you press the accelerator; one that takes two years turns growth into a bet financed by cash.
Customer acquisition cost in detail
The payback period
How many months of a customer billing it takes to cover what it cost to win them. It is more actionable than CAC alone, because it relates the cost to cash, which is what runs out.
Per channel, not in total
An average CAC hides that one channel brings customers at a third of what the other one costs. Splitting it by source usually changes where the money goes the following month.
Questions about customer acquisition cost
Which costs belong in CAC?
Everything that exists to win customers: advertising, marketing and sales tools, and the proportional share of the salaries of whoever does it. Leaving salaries out is the most common mistake.
What is a good LTV to CAC ratio?
Three to one gets quoted a lot, but the payback period matters more: a high LTV that takes three years to materialise does not pay next year salaries.
Related terms
A term on its own is only half understood. These come up in the same conversation.
LTV — Lifetime value
LTV estimates how much revenue a customer brings across their whole relationship with the company. At a SaaS it is approximated by dividing average monthly revenue per customer by the monthly churn rate: the less people leave, the more each customer is worth.
Runway
Runway is how many months a company can keep operating on the money it has, at the current rate of spend. It is calculated by dividing available cash by what gets burned each month, and it is the figure that orders every other decision.
Burn rate — Burn rate
Burn rate is the net money a company consumes each month: everything it spends minus everything it brings in. It is the denominator of runway and, at a company that bills, it is considerably lower than total spend.
ICP — Ideal customer profile
The ideal customer profile describes the kind of company the product works best for: its size, its sector, how it works and what problem it has. It is not who you sell to, it is who you should be selling to if you could choose.
Churn
Churn is the percentage of customers — or of revenue — lost in a period. It is the metric that decides whether a subscription business genuinely grows: with high churn, every new customer only fills the hole left by another.
MRR — Monthly recurring revenue
MRR is the sum of recurring revenue a subscription business bills each month, normalising annual contracts to their monthly equivalent. It excludes anything that does not repeat — implementations, consulting, one-off charges — because its job is to measure the stable base.
