Customer Acquisition Cost (CAC)
Definition
Dividing total sales and marketing spend by the number of new customers acquired gives you CAC (customer acquisition cost), the metric that determines whether your growth is profitable.
CAC is what it costs you to win a customer. Add up everything you spent on sales and marketing over a period, divide by the number of new customers you acquired, and that's your CAC. If you spent $50,000 last month on ads, content, and sales salaries and signed 100 new customers, your CAC is $500.
How to calculate CAC
The formula: CAC = Total Sales & Marketing Spend / New Customers Acquired. Include everything: ad spend, sales team salaries, tools, content production, events. Some companies calculate a "blended" CAC across all channels and a "paid" CAC that only includes direct acquisition spend. Both are useful.
In practice, most SaaS companies calculate CAC monthly or quarterly. Monthly gives you faster feedback loops but can be noisy. Quarterly smooths out the spikes from one-off campaigns or seasonal variations.
LTV:CAC ratio
CAC on its own doesn't tell you much. A $500 CAC is great if your customer lifetime value is $5,000. It's terrible if LTV is $400. The standard benchmark is a 3:1 LTV:CAC ratio, meaning each customer should generate at least three times what you spent to acquire them.
Below 1:1, you're losing money on every customer. Between 1:1 and 3:1, the economics are tight and you're vulnerable to any increase in churn. Above 5:1 might sound ideal, but it often signals you're underinvesting in growth and leaving market share on the table.
You can model your own ratio with our LTV calculator.
CAC payback period
How many months until a customer's revenue covers the cost of acquiring them. The formula is simple: CAC divided by monthly revenue per customer. If your CAC is $500 and your average MRR per customer is $49, payback is roughly 10 months. Most investors want to see payback under 12 months for SMB SaaS and under 18 months for enterprise.
Here's the thing: every customer who churns before their payback period is a net loss. That's why involuntary churn from failed payments is so destructive. You've already spent the acquisition cost, and the customer didn't even want to leave. Recovering them through dunning is the highest-ROI retention activity you can do.
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