Customer acquisition cost

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Customer Acquisition Cost (CAC) is the amount a company spends to acquire each new customer. It includes all sales and marketing expenses incurred in a given period.

How to calculate CAC?
CAC = Total sales and marketing spend / Number of customers acquired

For example, if you spent $10,000 this year and acquired 1,000 new customers, your CAC = 10,000 / 1,000 = $10.

Why calculate CAC?
CAC is one of the largest expenses a SaaS company incurs aside from perhaps product development coo email list itself. Therefore, it is important to understand the ROI of CAC on a regular basis. This ROI is calculated in three dimensions.

ARPA : If your average revenue per account is higher than your CAC, you're doing pretty well.

For example, if your CAC is $10 and your ARPA is $120, your CAC-ARPA ratio is 1.2x, which is good.

CLTV : If your customer lifetime value is a multiple of your CAC, you're in a good place.

For example, if your CAC is $10, but your CLTV is $1,200, your CAC-to-CLTV ratio is 120x, which is fantastic!

There is another reason you should calculate CAC: to understand your payback period.

5. Recovery period
The payback period is the time it takes for a SaaS company to recover the costs of customer acquisition. It is similar to the break-even point, after which all revenue is considered profit.

How to calculate the return on investment period?
Payback period = CAC / ARR

If you spend $10 on CAC and the customer pays an annual subscription of $120, your payback period is 10/120 = 0.083, or one month.

However, companies often look at gross margins rather than revenue when calculating payback. For example, out of $120 in revenue, if only 50% is gross margin, the payback period is 10/(120*50%), or two months.