On average, bootstrapped CEO’s pay $0.16 for $1 in new annual recurring revenue. CEO’s with more than $100m raised spend up to $2. More on that in a second.
What does CAC stand for?
CAC stands for customer acquisition cost.
If you knew you could spend $300 today to get a customer, you’re customer acquisition cost would be $300.
Is your Customer Acquisition Cost (CAC) high or low?
Below is a graph that plots 1424 SaaS companies and what they pay at different scales to get new customers.
Source: The Top Entrepreneurs Podcast daily interviews with SaaS founders and CEO’s
The Y Axis shows what companies pay to get $1 in new annual recurring revenue.
The X axis shows how much revenue those same companies are doing.
Notes on this graph:
- Bootstrapped SaaS companies spend between $0.28 and $0.94 to get $1 in new annual recurring revenue. If a company charges $1000 per year for their product, they’d pay $280-$940 to acquire that customer.
- SaaS companies that have raised less than $10m spend between $0.56 in early stages and scale up to spending $0.77 to get $1 in new annual recurring revenue to grow north of $50m in ARR.
- SaaS companies that have raised less than $100m scale CAC the fastest growing from $0.44 to $1.29 in spend to get $1 in new ARR to grow from $1m in ARR up to $50m+.
- Do not take this graph as gospel. Averages tend to cover important points but they also pull out useful trends. Generally, as you raise more, or scale to more revenue, you can afford to spend more of a customers total lifetime value on acquiring them.
What is a good Customer Acquisition Cost (CAC)?
For companies who are bootstrapped, you want to spend less than $1 on average to get $1 in new revenue. Unless the founder can put capital in the company to cover losses, you want to get your money back in under 12 months using tactics like annual upfront payment discounts.
For funded companies, spend as aggressively as you can to fine tune customer acquisition costs, channels, and models. This predictability will help you raise more capital to keep driving growth.
Examples of Customer Acquisition Cost (CAC)
Outreach.io is approaching $100m in annual revenues and is spending $65k to get a new customer that pays $40k in their first year. They spend $1.67 to get $1 in new ARR for a 20 month payback period. They can afford to wait 20 months to get paid back because they’ve raised $100m+ in funding. Tough for bootstrapped companies to survive on 20 month payback periods.
AutoKlose is doing $1m in annual revenues and is spending $400 to get a new customer that pays $324. They spend $1.23 to get $1 in new ARR for a 15 month payback period. They are bootstrapped.
How does Customer Acquisition Cost (CAC) relate to Payback Period?
If you pay $300 to get a new $300/yr customer, this would be a 12 month payback period. It also means you’re investing in a channel where you know you can spend $1 to get $1 in new annual recurring revenue (ARR).
The trick with CAC is to first measure it, and secondly to constantly be finding new places to acquire customers where your CAC gets cheaper or higher ROI over time.
Cheaper means, you can spend $25 to get a new $300 per year customer instead of spending $300.
Higher ROI means you have confidence in the customer LTV and spending more today to get the customer is worth it. Be careful though….
Should you optimize for a high LTV:CAC ratio or a quick payback period?
Quick quiz for you.
You have two companies to pick from.
Company A has an LTV:CAC ratio of 6, meaning if they spent $100 to get a customer that customer would spend $600 total over their life with the company. It takes this company 18 months to breakeven on a customer (CAC = total paid by customer).
Company B has an LTV:CAC ratio of 1.1 and a payback period of 0 (paid back on day 1).
Which company do you like more?
I’d argue more CEO’s need to think like Company B. Optimize to get your cash back quick so you can reinvest it fast. Time is more valuable than money. If you believed money was more important than time, you’d optimize for an LTV:CAC of 6, company A.