CAC definition
Customer Acquisition Cost (CAC) is the total cost a business incurs to acquire a single new paying customer. The fully loaded definition includes all sales and marketing salaries and commissions, advertising and demand-generation spend, marketing technology costs, sales tools and infrastructure, and an appropriate share of management overhead — divided by the number of new customers acquired in the same period.
CAC = Total Sales & Marketing Spend in Period ÷ New Customers Acquired in Period.
There are important nuances in this calculation. Some teams use a "blended" CAC that divides total S&M spend by all new customers; others calculate separate CAC figures for different channels (paid, organic, inbound, outbound) or customer segments (SMB, mid-market, enterprise) to understand efficiency at a more granular level.
CAC Payback Period
CAC alone is not a useful metric — its meaning depends entirely on the value of the customer acquired. The most common way to contextualise CAC is the CAC Payback Period: the number of months it takes for a new customer's gross margin contribution to recover the cost of acquiring them.
CAC Payback Period = CAC ÷ (Monthly ARR × Gross Margin %).
A business with a £12,000 CAC, £1,000 MRR per customer, and 75% gross margin has a CAC Payback Period of 16 months (£12,000 ÷ £750). Every month after month 16, that customer is contributing positive margin to the business.
Best-in-class SaaS businesses target a CAC Payback Period under 12 months. Consumer SaaS businesses often target under 6 months. Enterprise SaaS businesses with large contract values can tolerate longer payback periods — sometimes 24–36 months — because the contract is large, renewal rates are high, and expansion potential is substantial.
LTV:CAC ratio
Customer Lifetime Value (LTV) is the total gross margin a business expects to earn from a customer over the lifetime of the relationship. The LTV:CAC ratio compares what a customer is worth to what they cost to acquire — and is one of the most widely cited SaaS health metrics.
LTV = (Average ARR × Gross Margin %) ÷ Customer Churn Rate.
A ratio of 3:1 or higher is generally considered healthy for SaaS businesses — meaning each £1 of acquisition spend generates at least £3 of lifetime gross margin. Ratios below 1:1 mean the business is destroying value with each new customer acquired at current churn rates.
LTV:CAC is a useful directional metric but is sensitive to churn assumptions: a small change in assumed churn rate can dramatically alter LTV. FP&A teams should treat it as a scenario analysis tool rather than a precise forecast.
CAC efficiency and the implications for FP&A
For SaaS FP&A, CAC is a key lever in growth-versus-burn modelling. Increasing sales and marketing investment accelerates ARR growth but increases CAC and extends the path to profitability. Pulling back on S&M improves margins but slows ARR compounding. The right balance depends on NRR (high NRR reduces dependence on new customer acquisition), gross margin, and the availability and cost of capital.
A common FP&A exercise is to model the "efficient frontier" — the combination of S&M investment, growth rate, and Rule of 40 score that the business can achieve across different capital scenarios. This analysis informs fundraising strategy, budget allocation, and the CFO's narrative to the board.
