Customer Acquisition Cost

What is Customer Acquisition Cost (CAC)?

Customer Acquisition Cost, or CAC, measures the full cost of acquiring a new customer. For companies such as SaaS businesses, new customers are critical for the growth and ongoing revenues. CAC is a useful metric to monitor the costs associated with customer acquisition and to provide a benchmark on how well a company’s sales and marketing efforts are working. If CAC exceeds revenues over a long period of time, a company will run out of money and go out of business.

Importance of Customer Acquisition Cost (CAC)

Investors typically focus on the company’s key metrics prior to investment to help evaluate a company’s product performance and operational efficiency. Exploring a business’s CAC can also help identify weak spots and estimate the cash needs and growth potential of the business.

CAC is very useful when looking at early-stage businesses, or those operating a SaaS model as understanding revenue generation is critical to investment. Venture Capital and other early-stage investors will look at this prior to investing and will continue monitoring relevant metrics and evaluating the company’s progress towards a successful exit. It can provide a valuable insight into a company’s operations and growth trajectory, also help to identify any red flags in the business.

The cost of acquiring new customers needs to include full accounting of what it is costing the company to acquire each new customer – this includes all the costs incurred in customer acquisition, such as referral fees, customer credits, discounts, and others.

Formula for Customer Acquisition Cost

To calculate the CAC, we divide the sales and marketing expenses by the total number of new customers.

Customer Acquisition Cost (CAC) Calculation

There are three different types of customer acquisition costs (CAC):

Blended CAC

This is the total cost of acquiring a new customer, including all sales and marketing expenses. The blended CAC is calculated by taking the total sales and marketing costs and dividing this by the number of new customers for that period.

Paid CAC

This is the CAC only related to paid marketing campaigns such as the cost of an advertising campaign on Facebook. The paid CAC is useful for evaluating the viability of a business and whether a company can scale up its customer acquisition budget profitably. Paid CAC is often higher than blended CAC because marketing campaigns may not be the primary source of new customers. To calculate paid CAC, take the total expense related to marketing campaigns and divide it by the number of new customers generated from these campaigns.

Unpaid CAC

This is the CAC related to sales and marketing expenses excluding paid marketing campaigns. Unpaid CAC demonstrates the cost of acquiring customers through organic channels and other non-paid efforts. To calculate unpaid CAC, take total sales and marketing expenses, and subtract from this the marketing campaign expenses, then divide this number by the number of new customers generated outside our marketing campaigns.

Example of Customer Acquisition Cost

In this Example, we are going to calculate the blended customer acquisition costs (CAC), including the paid CAC and the unpaid CAC.

We’re provided with data over four quarters, including the most recent quarter, shown below.

The steps to build this CAC model are as follows:

1. Calculate recurring revenue. Recurring revenue in this case is going to be equal to the number of customers at the end of each quarter multiplied by the SaaS price per customer.
2. Calculate the total sales and marketing costs. Take the percentage of total sales and marketing costs as a percentage of recurring revenue.
3. Calculate the different types of costs within our total sales and marketing costs, starting with sales team expenses.
4. Calculate marketing campaign expenses, which is a percentage of our total sales and marketing costs.

The blended CAC is calculated by taking the total sales and marketing costs and dividing this by the number of new customers for that period. Which for Q1 is $1,880.0.

The paid CAC is calculated by taking the total expense related to marketing campaigns and dividing it by the number of new customers generated from these campaigns. For Q1 this is $7,520.0.

The paid CAC is larger than the blended CAC because our marketing campaign expenses are a percentage of our total sales and marketing costs, but we’re only generating a percentage of our new customers from these campaigns.

Unpaid CAC is calculated by taking our total sales and marketing expenses, subtracting from this the marketing campaign expenses, and dividing this number by the number of new customers generated outside our marketing campaigns. Which for Q1 is $1,253.3.

Download the Financial Edge CAC workout template to see how this looks for all four quarters and test your understanding.

Conclusion

Customer Acquisition Cost (CAC) is crucial for any business, particularly SaaS companies, as it tracks the total cost of acquiring new customers. CAC helps monitor sales and marketing efficiency and serves as a benchmark for a company’s growth efforts. If CAC consistently exceeds revenue, the company will run out of money. Investors highly value CAC as a metric for evaluating a company’s performance and operational efficiency, as it provides insights into a company’s operational health and growth potential.

To learn more about CAC and other key industry metrics associated with start-ups and SaaS businesses, build on your learning with the Venture Capital Associate course. This online course covers over 50 hours of playlists and explanations of concepts associated with early-stage investing, and 295 practical exercises to reinforce learning and knowledge.