Understanding the “CAC” or Customer Acquisition Cost

CAC

ILIAN SETHI

Approx. reading : about 5 min

What is the “CAC”: Customer Acquisition Cost?

CAC (customer acquisition costs) refers to the total amount you spend on acquiring a new customer, including all sales and marketing expenses that you pay to get those customers.

A company with “as-a-service” solutions offers an average of 92% of its first year revenue on customer acquisition. In other words, it takes 11 months to reimburse their customer acquisition cost.

CAC is crucial for every business, but its analysis is even more vital for “as-a-service” solution offerings because CAC depends part of the customer’s lifetime value. 

As the leader of a company offering “as-a-service” solutions, you would not want to acquire a customer who is likely to have significant lifetime value but who is in fact just as expensive to win (and for zero profitability or even a loss in the end).

In this article, I’ll tell you why CAC is important and how to calculate your CAC.

Let’s go !

Why is CAC an important indicator?

Customer acquisition cost indicates how long it will take to generate profit from each customer. CAC also helps measure the effectiveness of your marketing strategies.

Here are some of the main reasons why CAC is important for “as-a-service” businesses:

If you track your CAC consistently, you can gain tremendous insight into several factors in your business model, such as price efficiency, churn rate, and customer success.

When you know the cost of acquiring a customer and how it relates to the value of the subscription, you can scale your SaaS business more effectively.

This makes it easier for you to improve your business model and the value of your business.

What is a good CAC ratio for your “as-a-service” value proposition and solution?

A good CAC ratio for your business depends on the lifetime customer value of your business.

CAC and LTV (Customer Lifetime Value – see our article on the subject) go hand in hand:

The industry benchmark for the LTV: CAC ratio for companies with as-a-service offerings is an objective average of 3: 1

You should aim for a ratio of 3: 1 or more to stay profitable.

However, if the ratio is too high (5: 1 or more), there is a good chance that you are under-spending in the acquisition process and thus hamper the growth.

Impact and consequence depending
on the LTV: CAC ratio

1:1 You will lose money and exponentially from your sales
3:1 Target Standard Ratio - Your business can be profitable
4:1 Your business model is virtuous, your customer acquisition is profitable
5:1 Unbalanced Ratio, Are You Investing Enough in Marketing?

abigael technologies research – 2018 / 2021

Therefore, if you spend $ 5,000 to acquire a client, you should aim to earn at least $ 15,000 from each (as per the ratio 3:1).

How should you calculate your CAC ratio?

To calculate your CAC, divide your total sales and marketing expenses by the total number of customers acquired in a given time period.

Your sales and marketing expenses should include everything related to it, such as:

For example, if your sales and marketing spend for that month is $ 5,000 and you’ve acquired 25 new customers, your CAC will be: CAC = 5,000/25 = $ 200 per customer.

You can calculate the time it takes to collect CAC by dividing the CAC by the difference between the monthly recurring revenue and the average cost of the service.

For example, if your Average Monthly Recurring Revenue (MRR) per customer per month is $ 100 and the Average Cost of Service (ACS) is $ 60, the time it takes to collect CAC will be:

CAC payback period = 200 / (100-60) = 5 months

To calculate LTV (Customer Lifetime Value), divide the average revenue per customer by the average churn rate.

For example, if your gross margin per customer is 40% and the average churn rate per month is 4%, your LTV will be:

LTV = (100 * 40) / 4 = EUR 1000.00

So your LTV: CAC ratio will be 1000.00 / 200 = 5.00 : 1, which is above the industry benchmark.

How should you calculate your CAC ratio?

72% of acquisition strategies are executed without prior calculation of ROI

abigael technologies research – 2018 / 2021

The cost of customer acquisition has a huge impact on the success of an “as-a-service” business. Follow the tips mentioned in this article to lower your CAC.

Make sure your LTV: CAC ratio is above the industry benchmark (3: 1). Track the right metrics to determine the effectiveness of your customer acquisition tactics. And don’t forget to experiment with different strategies.

Good luck in your customer acquisition!

About DOTSHA

dotsha delivers the first subscription-to-cash automation platform designed to put every subscription-based or usage-based business on autopilot … from early subscription to cash collection!  

Your business can scale fast without turning its back-office into a mess! 

Keep growing faster… we’ve got your back !

All-In-One platform that unify {Pricing}+{Check-in}+{Billing}+{Payments}+{Dunning}+{Reporting} while the MRR just keeps growing, dotsha’s plaform is an easy to use and quickly implemented cloud-based platform that augment your existing information system with robust API integrations in order to deliver optimal automation with minimal code. You will forget we are there!

ILIAN SETHI

Approx. reading : about 5 min

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