Why is CAC so important to a business?
Customer acquisition cost is a direct reflection of the future success of your SaaS business. Most SaaS companies put forth a lot of time and money before seeing a return on that investment. This metric will begin to matter more and more as time passes, and you begin to add up the months it takes to recover from CAC and actually turn a profit.
Figure 1 depicts the early period of the acquisition process (highlighted in red) where your SaaS business is spending time and money. Then as time passes, your customer starts to pay monthly for your subscription service, and you eventually break even and make your money back on the initial investment. From then on is a magical period (highlighted in green) where you’re rolling in the dough and netting a profit from that customer until they decide to cancel (which is hopefully never).
More specifically (and bluntly), understanding your CAC is important for three key reasons:
1. Optimize your LTV/CAC ratio to 3 or higher
Every quarter you should be managing your LTV/CAC ratio by optimizing sales and marketing output. You constantly need to be optimizing your channels and tactics to ensure you're optimizing this ratio and making that green triangle as large as humanly possible. For a benchmark, you want this number to net out to at least 3, meaning for every dollar you put in your SaaS machine, you're getting 3 out.
2. Determine and optimize your payback period
As soon as you acquire a new paying customer, you instantly have lost money. This means the first thing on the agenda moving forward should be getting back that amount of money you paid upfront as soon as humanly possible. Think of the payback period as the next layer of CAC because it reveals a much more dense look at how your channels and business as a whole are doing from an acquisition front, especially if you're employing a freemium model. Check out this post from HubSpot on how their product team thinks about the payback period.
3. Track and optimize your CAC ratio
Oh yes, CAC goes deeper than simply the CAC to what's known as the CAC ratio. The reason this number is so important (and will be written about in the future) is that the purpose of a business is to generate a margin, not just revenue. As such, the CAC ratio takes gross margin over the costs of customer acquisition and tracks it over time.