CAC — Customer Acquisition Cost

What is CAC?

CAC (Customer Acquisition Cost) is the total sales and marketing cost for a period divided by the number of new paying customers acquired in that same period. On its own the number says little: the same amount can be reasonable for customers who pay for years and far too high for customers who leave after a quarter. That is why CAC is read together with LTV, the value a customer brings over the whole relationship, and with the payback period, the number of months before the margin from a customer covers the cost of winning them.

How to calculate CAC

The numerator holds every cost incurred to win new customers:

• media spend on search and social advertising,
• the share of marketing and sales salaries that goes into acquisition,
• tools such as a CRM, marketing automation and analytics, plus agencies and contractors,
• content production, sales commissions, events and trade shows.

The cost of serving existing customers and of building the product stays out. Whether to add a share of company overhead is a definitional choice; what matters is keeping the rule constant once it is set.

The denominator counts new paying customers. Not leads, and not trial sign-ups. An existing customer moving to a higher plan is Expansion MRR, not a new customer; the MRR entry covers that distinction.

A worked example

The figures are illustrative. A SaaS company spends $60,000 on sales and marketing in a quarter and signs 30 new paying customers in the same quarter:

• CAC = 60,000 ÷ 30 = $2,000

That is the same $2,000 the MRR entry uses in its CAC payback example.

Blended CAC vs. channel CAC

The result above is blended CAC, an average across every channel. Suppose $30,000 of the $60,000 went to paid campaigns (media plus campaign management) and 10 of the new customers are attributed to them:

• Paid campaign CAC = 30,000 ÷ 10 = $3,000

The blended $2,000 hides the fact that this channel is 50% more expensive per customer. The other twenty customers were not free either: the content, SEO and team costs that brought them in sit in the remaining $30,000. How customers are split between channels depends on the attribution model, so channel CAC always carries that model's assumptions.

A paid channel's CAC is driven by the cost per click (CPC) and by the conversion rate at every step of the funnel, from click to sign-up and from sign-up to a paid plan. ROAS measures something else: it relates ad spend to revenue, while CAC relates the whole cost of acquisition to a single customer.

CAC payback and MRR

CAC payback in months = CAC ÷ (ARPA × gross margin). With the numbers from the MRR entry, an ARPA of $250 and an 80% gross margin:

• Payback = 2,000 ÷ (250 × 0.8) = 2,000 ÷ 200 = 10 months

Calculated on revenue instead of margin, it would come out shorter: 2,000 ÷ 250 = 8 months. That figure is too optimistic, because every dollar of subscription revenue still has to pay for delivering the service.

Every new customer adds to New MRR. If the 30 customers in the example pay the average ARPA, the quarter adds 30 × 250 = $7,500 of new MRR. The payback period itself does not depend on churn, but a customer who cancels before month ten never pays back the cost of acquiring them.

CAC and LTV

The LTV entry derives a customer value of $8,000 from an ARPA of $250, an 80% gross margin and 2.5% monthly churn: the margin an average customer brings in over the whole relationship. The LTV:CAC ratio is therefore 8,000 ÷ 2,000 = 4, or 4:1. A ratio below 1 means every customer costs more than the margin they bring in. The LTV entry explains how to read higher values.

The organic channel and time lag

SEO and content costs belong in the numerator just like the ad budget. The difference is timing: much of that cost is paid up front, while published content keeps working long after the quarter ends. A single-quarter organic CAC therefore tends to read high early on and lower later, so it is more reliable when measured over a longer window.

In B2B with long sales cycles, costs in one quarter bring in customers in the next. Either shift costs by the typical length of the cycle or calculate CAC over a rolling window.

The organic channel is judged first by impressions, clicks and sign-ups. CAC is the next layer: it shows what a paying customer who grew out of that traffic actually costs. We describe how to measure the organic channel from sign-up upward on our SEO for SaaS page and in the articles on how to calculate SEO ROI and SEO for SaaS.

Common mistakes

• Counting media spend only and calling the result the company's CAC.
• Putting leads or trial sign-ups in the denominator instead of paying customers.
• Counting upgrades from existing customers as new customers.
• Ignoring the lag between spend and signed contracts in a long sales cycle.
• Treating a low blended CAC as proof that a specific paid channel works.
• Using one average across segments whose customers differ widely in size.
• Comparing CAC with revenue-based LTV instead of margin-based LTV.
• Changing the definition mid-year.

Related terms

• MRR — recurring revenue that new customers enter as New MRR
• LTV — customer value, set against CAC in the LTV:CAC ratio
• Churn rate — the cancellation rate that decides whether a customer stays long enough to pay back CAC
• Attribution model — the rule for assigning customers to channels
• ROAS — return on ad spend, measured on revenue rather than per customer
• KPI — CAC is one of the headline sales and marketing KPIs