Customer acquisition cost (CAC) is the amount of money you spend on sales and marketing to acquire a subscriber.
When this sales and marketing cost is combined with your gross profit
number for the same period, you can calculate an important ratio: the CAC ratio. This is a valuable metric because it puts the basic CAC cost into a longer term projection number.
Depending on how you express the ratio (we'll show you that in the calculator), it will tell you
1. either the percentage of your sales and marketing expenses that you will recover in one year
2. or the years it will take you to recover your customer acquisition sales and marketing expenses.
In either case this is a key metric is measuring the profitability of your SasS business.
How to Calculate Customer Acquisition Cost and Ratio
1. Determine the total revenue from subscriptions in a given month. Make sure you don't include one-time setup, onboarding and administration fees.
2. Determine your sales and marketing expenses during the month.
3. Determine how many new subscribers you added during the month.
Your CRM and accounting system are excellent sources
for this information.
Tips to keep in mind as you measure these costs ...
In the early stages of your SaaS business, it's likely that you will first acquire "friends and connected relationship" subscribers. These are the low-hanging fruit customers who will kick-start your subscriber base. This means your early numbers might be skewed since the sales and marketing expenses may not be an accurate reflection of ongoing customer acquisition costs.
Often the sales and marketing expenses do not occur in the same month that the new subscriber is acquired. There is typically a lag between customer awareness and purchase.
The more closely you track and monitor customer acquisition activities with sales, the more accurately your CAC costs and ratios will be.
Example ...
Period: 8/1/20xx-8/31/20xx
Revenue
Monthly Subscriptions Revenue
$ 600
Cost of Goods Sold (COGS)
Data Center Expenses
$ 250
Internet Expenses
$ 150
Gross Margin
$ 200
Sales and Marketing Expenses
Social Media Ads
$ 1500
Content Writer
$ 2200
Sales Salary
$ 4500
Total Sales and Marketing
$ 8200
Customer Acquisition Costs
New Subscribers Acquired
50
Cost of Customer Acquisition
$ 164
Cost Recovered in One Year
29% (Ratio 1)
Years to Recover Expenses
3.42 years (Ratio 2)
Simple Customer Acquisition Cost Formula Cheatsheet
CAC = Total sales and marketing expenses for the month / Number of new subscribers acquired during the month.
