Why it matters
In 1990, Frederick Reichheld and W. Earl Sasser argued in Harvard Business Review that winning new customers costs far more than keeping existing ones, which popularized customer economics. As SaaS spread in the 2000s, the subscription model made a problem obvious: when customers pay a little each month, recovering acquisition costs takes time. In 2010 venture capitalist David Skok's "SaaS Metrics" guide set the benchmarks of 3x LTV:CAC and a 12-month payback. CAC has been a standard investor yardstick for startups ever since.
How to calculate it
Say you spent $30,000 on marketing and $20,000 on sales salaries in a month and gained 500 customers. Your CAC is $100. Dividing by all new customers, organic included, gives blended CAC. Dividing by ad-acquired customers only gives paid CAC, which is usually higher. CAC means little on its own, so compare it with customer lifetime value (LTV). An LTV:CAC ratio below 1 means each new customer loses money, while 3 or more is considered healthy. CAC payback is CAC ÷ monthly gross profit per customer; the shorter it is, the better your cash flow.
How to lower it
CAC tends to rise as ad auctions get more crowded, so channels that don't depend on paid ads matter. Grow organic traffic with SEO and content, use growth hacking tactics such as referral rewards, and lift conversion at each stage of the marketing funnel. Each brings in more customers for the same spend. Cutting churn raises LTV, which also improves the ratio.
FAQ
- Should salaries be included in CAC?
- Yes. Fully loaded CAC includes sales and marketing salaries and tools.
- Is an LTV:CAC above 5 always good?
- Not necessarily. It may mean you're underinvesting in growth and could spend more.
Sources reviewed: 2026-10-26
References
- Skok, D. (2010). SaaS Metrics – A Guide to Measuring and Improving What Matters. For Entrepreneurs.
- Gupta, S., & Lehmann, D. R. (2005). Managing Customers as Investments. Wharton School Publishing.
- Reichheld, F. F., & Sasser, W. E. (1990). Zero defections: Quality comes to services. Harvard Business Review, 68(5), 105–111.