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.
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