Mar 7, 2023

Customer Acquisition Cost (CAC)

What is CAC

CAC, or Customer Acquisition Cost, is a metric used in the software as a service (SaaS) industry to measure the cost of acquiring a new customer. It is calculated by taking the total cost of sales and marketing efforts divided by the number of new customers acquired during that period. CAC is important for SaaS companies because it allows them to understand the efficiency and effectiveness of their sales and marketing efforts, and to make informed decisions about how to allocate resources.

Why CAC is important

CAC is an important metric for SaaS companies because it helps them understand the true cost of acquiring a new customer. This information is critical for making informed decisions about how to allocate resources, such as budget and personnel, in order to maximize revenue growth. Additionally, CAC can be used to compare the performance of different sales and marketing channels, such as online advertising, cold calling, or trade shows, and to identify which channels are the most cost-effective.

How CAC is calculated

CAC can be calculated using the following formula:

CAC = Total Cost of Sales and Marketing / Number of New Customers Acquired

It is important to note that the time frame used to calculate CAC should be consistent, such as a calendar month or fiscal quarter.

What costs are included in CAC

The costs that are included in the calculation of CAC can vary depending on the specific SaaS company and the nature of their sales and marketing efforts. However, some common costs that are typically included are:

  • Salaries and benefits for sales and marketing personnel

  • Advertising and promotional expenses, such as Google AdWords or trade show booths

  • Commissions and bonuses paid to salespeople

  • Any other direct costs associated with acquiring new customers

It's important to note that these costs should only include the expenses that are directly related to acquiring new customers and not the costs that are related to servicing or retaining them.

What costs are excluded in CAC

Some costs that are typically excluded from the calculation of CAC include:

  • General and administrative expenses, such as rent and utilities

  • Research and development expenses

  • Costs associated with servicing or retaining existing customers

  • The cost of goods sold

How to improve CAC metrics

There are several ways that SaaS companies can improve their CAC metrics, including:

  • Optimizing sales and marketing efforts: By identifying and focusing on the most cost-effective channels for acquiring new customers, SaaS companies can reduce their CAC.

  • Improving conversion rates: By increasing the number of leads that are converted into paying customers, SaaS companies can reduce the number of leads they need to acquire in order to reach their revenue goals, which will also lower their CAC.

  • Increasing customer lifetime value: By retaining customers for longer periods of time, SaaS companies can spread the cost of acquiring a customer over a longer period of time, which will also lower their CAC.

Why investors value low CAC

Investors value companies with low CAC because it indicates that the company has a strong and efficient sales and marketing strategy. A low CAC means that the company is able to acquire new customers at a relatively low cost, which is important for sustainable revenue growth and profitability. Additionally, a low CAC also means that the company has a high customer lifetime value, which can be leveraged to generate more revenue over time.

In terms of valuation at exit, a low CAC is a great indication that the company has a strong sales and marketing strategy and can acquire customers in a cost-effective way. Furthermore, a low CAC also means that the company has a high customer lifetime value, which is an important factor in determining the overall value of the company. This is because companies with high customer lifetime value are able to generate more revenue over time and are therefore more valuable to investors. In addition, companies with low CAC also have a better chance of reaching profitability faster, which is also a key factor in determining the overall value of the company.

It is also important to note that CAC is not only a metric that matters to investors, but it also matters for the management team as well. A low CAC means that the company has a strong sales and marketing strategy and is able to acquire customers in a cost-effective way. This is important for sustainable revenue growth and profitability, which ultimately leads to a higher valuation at exit.

In conclusion, CAC is an important metric for SaaS companies to measure the cost of acquiring new customers. It is important to include all direct costs that are related to acquiring new customers and exclude all costs that are related to servicing or retaining them. Companies can improve their CAC metrics by optimizing their sales and marketing efforts, increasing conversion rates and increasing customer lifetime value. Low CAC is valued by investors as it indicates a strong sales and marketing strategy, high customer lifetime value and better chances of reaching profitability faster.

Relation with other SaaS metrics

It is worth mentioning that CAC should be balanced with LTV (Life Time Value) which is a metric that measures the total revenue a customer will generate for a company over the course of their lifetime. A high LTV means that a customer is worth more to a company, and thus a lower CAC can be justified. In other words, a high LTV can offset a higher CAC.

Another important thing to note is that CAC should also be considered in the context of the company's overall growth stage. For example, a startup company may have a higher CAC as they are still building their customer base and expanding their marketing and sales efforts, while a more established company may have a lower CAC as they have already established their customer base and have more efficient sales and marketing processes in place.

Furthermore, CAC should be considered alongside other key SaaS metrics such as Monthly Recurring Revenue (MRR), Churn Rate, and Gross Margins. These metrics together will provide a complete understanding of the company's financial performance, and help in decision making.

In addition, there are several ways to lower CAC, such as:

  • Creating a strong brand that generates organic leads

  • Leveraging referral marketing

  • Building a strong sales team with the right incentives

  • Implementing marketing automation

  • Leveraging free trials

  • Utilizing content marketing

  • Focusing on customer retention

In conclusion, CAC is an important metric for SaaS companies to measure the cost of acquiring new customers. It is important to consider it in the context of LTV, growth stage, and other key SaaS metrics. Additionally, there are several ways to lower CAC and it is important for companies to focus on improving this metric in order to achieve sustainable revenue growth and profitability.

Sources:

  • "SaaS Metrics 2.0: A Guide to Measuring and Improving What Matters" by David Skok

  • "The Ultimate SaaS Metrics Cheat Sheet" by Christoph Janz

  • "The SaaS Metrics That Matter" by Lincoln Murphy

  • "The Anatomy of a SaaS Metrics Dashboard" by Joel York

  • "The Complete Guide to SaaS Metrics" by OpenView Partners

  • "The Key SaaS Metrics Every Startup Should Track" by Aaron Ross

  • "The SaaS Metrics Bible" by Tom Tunguz

  • "The SaaS CFO Playbook: Building and scaling a SaaS company" by Jason Lemkin

Customer Acquisition Cost (CAC)

What is CAC

CAC, or Customer Acquisition Cost, is a metric used in the software as a service (SaaS) industry to measure the cost of acquiring a new customer. It is calculated by taking the total cost of sales and marketing efforts divided by the number of new customers acquired during that period. CAC is important for SaaS companies because it allows them to understand the efficiency and effectiveness of their sales and marketing efforts, and to make informed decisions about how to allocate resources.

Why CAC is important

CAC is an important metric for SaaS companies because it helps them understand the true cost of acquiring a new customer. This information is critical for making informed decisions about how to allocate resources, such as budget and personnel, in order to maximize revenue growth. Additionally, CAC can be used to compare the performance of different sales and marketing channels, such as online advertising, cold calling, or trade shows, and to identify which channels are the most cost-effective.

How CAC is calculated

CAC can be calculated using the following formula:

CAC = Total Cost of Sales and Marketing / Number of New Customers Acquired

It is important to note that the time frame used to calculate CAC should be consistent, such as a calendar month or fiscal quarter.

What costs are included in CAC

The costs that are included in the calculation of CAC can vary depending on the specific SaaS company and the nature of their sales and marketing efforts. However, some common costs that are typically included are:

  • Salaries and benefits for sales and marketing personnel

  • Advertising and promotional expenses, such as Google AdWords or trade show booths

  • Commissions and bonuses paid to salespeople

  • Any other direct costs associated with acquiring new customers

It's important to note that these costs should only include the expenses that are directly related to acquiring new customers and not the costs that are related to servicing or retaining them.

What costs are excluded in CAC

Some costs that are typically excluded from the calculation of CAC include:

  • General and administrative expenses, such as rent and utilities

  • Research and development expenses

  • Costs associated with servicing or retaining existing customers

  • The cost of goods sold

How to improve CAC metrics

There are several ways that SaaS companies can improve their CAC metrics, including:

  • Optimizing sales and marketing efforts: By identifying and focusing on the most cost-effective channels for acquiring new customers, SaaS companies can reduce their CAC.

  • Improving conversion rates: By increasing the number of leads that are converted into paying customers, SaaS companies can reduce the number of leads they need to acquire in order to reach their revenue goals, which will also lower their CAC.

  • Increasing customer lifetime value: By retaining customers for longer periods of time, SaaS companies can spread the cost of acquiring a customer over a longer period of time, which will also lower their CAC.

Why investors value low CAC

Investors value companies with low CAC because it indicates that the company has a strong and efficient sales and marketing strategy. A low CAC means that the company is able to acquire new customers at a relatively low cost, which is important for sustainable revenue growth and profitability. Additionally, a low CAC also means that the company has a high customer lifetime value, which can be leveraged to generate more revenue over time.

In terms of valuation at exit, a low CAC is a great indication that the company has a strong sales and marketing strategy and can acquire customers in a cost-effective way. Furthermore, a low CAC also means that the company has a high customer lifetime value, which is an important factor in determining the overall value of the company. This is because companies with high customer lifetime value are able to generate more revenue over time and are therefore more valuable to investors. In addition, companies with low CAC also have a better chance of reaching profitability faster, which is also a key factor in determining the overall value of the company.

It is also important to note that CAC is not only a metric that matters to investors, but it also matters for the management team as well. A low CAC means that the company has a strong sales and marketing strategy and is able to acquire customers in a cost-effective way. This is important for sustainable revenue growth and profitability, which ultimately leads to a higher valuation at exit.

In conclusion, CAC is an important metric for SaaS companies to measure the cost of acquiring new customers. It is important to include all direct costs that are related to acquiring new customers and exclude all costs that are related to servicing or retaining them. Companies can improve their CAC metrics by optimizing their sales and marketing efforts, increasing conversion rates and increasing customer lifetime value. Low CAC is valued by investors as it indicates a strong sales and marketing strategy, high customer lifetime value and better chances of reaching profitability faster.

Relation with other SaaS metrics

It is worth mentioning that CAC should be balanced with LTV (Life Time Value) which is a metric that measures the total revenue a customer will generate for a company over the course of their lifetime. A high LTV means that a customer is worth more to a company, and thus a lower CAC can be justified. In other words, a high LTV can offset a higher CAC.

Another important thing to note is that CAC should also be considered in the context of the company's overall growth stage. For example, a startup company may have a higher CAC as they are still building their customer base and expanding their marketing and sales efforts, while a more established company may have a lower CAC as they have already established their customer base and have more efficient sales and marketing processes in place.

Furthermore, CAC should be considered alongside other key SaaS metrics such as Monthly Recurring Revenue (MRR), Churn Rate, and Gross Margins. These metrics together will provide a complete understanding of the company's financial performance, and help in decision making.

In addition, there are several ways to lower CAC, such as:

  • Creating a strong brand that generates organic leads

  • Leveraging referral marketing

  • Building a strong sales team with the right incentives

  • Implementing marketing automation

  • Leveraging free trials

  • Utilizing content marketing

  • Focusing on customer retention

In conclusion, CAC is an important metric for SaaS companies to measure the cost of acquiring new customers. It is important to consider it in the context of LTV, growth stage, and other key SaaS metrics. Additionally, there are several ways to lower CAC and it is important for companies to focus on improving this metric in order to achieve sustainable revenue growth and profitability.

Sources:

  • "SaaS Metrics 2.0: A Guide to Measuring and Improving What Matters" by David Skok

  • "The Ultimate SaaS Metrics Cheat Sheet" by Christoph Janz

  • "The SaaS Metrics That Matter" by Lincoln Murphy

  • "The Anatomy of a SaaS Metrics Dashboard" by Joel York

  • "The Complete Guide to SaaS Metrics" by OpenView Partners

  • "The Key SaaS Metrics Every Startup Should Track" by Aaron Ross

  • "The SaaS Metrics Bible" by Tom Tunguz

  • "The SaaS CFO Playbook: Building and scaling a SaaS company" by Jason Lemkin