The math, shown
Customer acquisition cost (CAC) is what it costs, on average, to win one new paying customer.
CAC = total sales and marketing spend ÷ new customers acquired
Total sales and marketing spend
Everything you spent to win customers in the period: ad spend, sales and marketing salaries and commissions, tools, agencies and events. Counting ad spend alone understates CAC.
New customers acquired
Customers who paid for the first time in the same period. Existing customers who renew or upgrade are not new customers.
Worked example
Suppose a company spent $45,000 on sales and marketing in a month and won 90 new customers in that month.
$45,000 ÷ 90 = $500. It costs this company $500, on average, to win one customer.
How to read your result
CAC does not tell you much on its own. A $500 CAC is excellent for a product that earns $5,000 from each customer and a problem for one that earns $300. Compare it with what a customer is worth.
Two common yardsticks come from David Skok’s SaaS metrics work. The best SaaS businesses have a lifetime value (LTV) that is more than three times CAC, and many recover their CAC in five to seven months. As a general guideline he suggests recovering it in under 12 months, although some enterprise businesses with long contracts accept longer. Use the LTV calculator to compare.
Frequently asked questions
What should I include in sales and marketing spend?
Include all the cost of winning customers in the period: advertising, the salaries and commissions of the people who sell and market, software, agencies and events. This is often called a fully loaded CAC. Counting advertising alone gives a paid CAC, which is lower and not comparable with a fully loaded figure. Skok also notes that in an early-stage business you may need to allocate only part of a founder’s or senior person’s salary.
Which period should I use?
Use the same period for both numbers, such as the same month or quarter. If your sales cycle is long, spend in one month wins customers months later, so a quarter or longer smooths out the timing.
What is a good CAC?
There is no single good number, because it depends on what a customer is worth to you. Compare CAC with LTV and with how many months of gross profit it takes to earn it back, as described above.
Sources
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Written by the Webtilly team
Note: This calculator provides an estimate based on the formula shown above. It is not tax, legal, or financial advice.