Recovering Customer Acquisition Cost (CAC)

An important measure in subscription businesses is how long it takes to recover the initial Customer Acquisition Cost (CAC), which for some, is the single most expensive expenditure in a customer’s lifetime. Recovery time is typically measured in months.

# of Months to Recover CAC = Customer Acquisition Cost (CAC)
[Customer Lifetime Value (CLTV) ÷ Customer Lifetime (Measured in Months)]


                         OR

# of Months to Recover CAC = Customer Acquisition Cost (CAC)
[Average monthly recurring revenue (MRR) Per Customer X Gross Margin %]

EXAMPLE (based on the first formula): You want to know how long it will take to recover your CAC.

First, you need to calculate your CAC. Your marketing and sales costs include:

  • Marketing personnel cost: $90,000 (3 employees X average employee salary per quarter)
  • Sales personnel cost: $185,000 [(5 employees X average employee salary per quarter) + commissions]
  • External agencies cost: $60,000
  • Program spend: $110,000
  • Total spend: $445,000

You acquire 50 new customers.

Your CAC is $8,900 ($445,000 total costs ÷ 50 new customers).

Second, you need to calculate your CLTV, which includes:

  • Average monthly revenue per customer: $2,000
  • Gross margin: 60%
  • Customer lifetime: 18 months

Your CLTV is $21,600 ($2,000 X 60% X 18).

Therefore, it will take 7.4 months to recover your CAC [$8,900 CAC ÷ ($21,600 CLTV ÷ 18 months)].

There are many benchmarks on healthy CAC spending, but it really depends on your CLTV, so we recommend focusing on the CLTV:CAC ratio.