Customer Acquisition Cost (CAC) is the average cost of acquiring a customer for a business. While it applies to most businesses, it assumes a higher degree of importance in a subscription based business like SaaS, Cloud Infrastructure to measure the profitability on a given customer.
Customer Acquisition Cost is measured as ratio of the
(Total Cost of Sales + Total Cost of Marketing + Miscellaneous Costs*)/(Annual Contract Value)
Typically companies bucket most of the costs like on-boarding costs or any free implementation costs as part of the Cost of Sales. But I wanted to call that out separately.
A CAC Ratio of less than 1 indicates that your have a highly optimized Sales, Marketing and Client Services organization. It means you are profitable on a given customer before the end of year 1.
A CAC Ratio of more than 2 indicates, you need to fine tune your sales operations and identify opportunities to reduce time and cost to contract.
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