Customer acquisition cost (CAC) is another unit economics measurement your B2B software business should be tracking.
Why should I track customer acquisition cost?
Customer acquisition cost, as the name implies, is the cost of bringing on a new customer. In the case of SaaS companies, it’s the cost of bringing on a customer to buy your initial software product. Measuring CAC allows you to track how effective your marketing campaigns are and the overall efficiency of your customer acquisition strategy. Reducing CAC by optimizing marketing spend or through other means allows you to increase the profit margin of your product.
How do I calculate CAC?
First, you need to consider all the costs that go into acquiring a customer. This can include any of the following costs, but, of course, will depend on your specific company:
- Advertising costs
- Marketing and sales team costs
- Publishing and production costs
- Inventory costs
- Technical costs
Once you have the total costs you spend on acquiring customers, scale this number to a certain timeframe, and divide this number by the number of new customers brought on in that same time period.
So, for example, if you spend $1000 on the costs above in a year and brought on 100 new customers in that same year, your CAC is $1000 / $100 or $10.
How should I think about my customer acquisition cost?
It’s important to note that your CAC isn’t incredibly meaningful on its own. This number has to be put in context with the amount of revenue a typical customer brings in. This is where your customer lifetime value (LTV) metric comes in. If you find that your CAC is $100 and your LTV is $100 as well, then you know that you’re spending the same amount to acquire a customer as the amount of revenue said customer brings into your company. This would indicate that you should either work to reduce your CAC or increase LTV. Alternatively, if your CAC is $100 but your LTV is $2000, then the tradeoff makes sense. You’re spending $100 for $2000 in revenue, demonstrating an effective marketing and acquisition strategy.
You can improve your CAC in many ways, including the following:
- Cutting back on marketing spend
- Optimizing marketing spend through more specific targeting efforts
- Reducing technical and product development costs
- Improve no- or low-cost conversion metrics (e.g., leads that come in organically to your website)
Now that you’ve improved your customer acquisition cost, what’s next? Check out our guide to how B2B founders should think about revenue growth.