Customer Acquisition Cost (CAC)
Quick Definition
Customer Acquisition Cost (CAC) is a key business metric that calculates the total cost of acquiring a new customer. It includes all marketing and sales expenses divided by the number of customers acquired in a specific period.
The total cost of acquiring a new customer, including marketing, sales, and associated expenses.
💡 Quick Example
If you spent $10,000 on marketing last month and acquired 100 new customers, your CAC is $100.
Customer Acquisition Cost (CAC) is one of the most critical metrics for any growing business. It tells you exactly how much you're spending to bring each new customer through your door.
Why CAC Matters
Understanding your CAC is essential for:
- Budget allocation: Know where to invest your marketing dollars
- Profitability assessment: Ensure you can afford to acquire customers
- Growth planning: Scale your customer acquisition efforts effectively
- Investor discussions: VCs and investors closely examine CAC trends
How to Calculate CAC
The basic formula is straightforward:
CAC = Total Acquisition Costs ÷ Number of New Customers Acquired
What to Include in Total Acquisition Costs
- Marketing spend (ads, content, events)
- Sales team salaries and commissions
- Marketing tools and software
- Agency fees
- Promotional offers and discounts
CAC by Channel
Smart businesses track CAC for each acquisition channel:
- Paid advertising: Google Ads, Facebook Ads, LinkedIn
- Content marketing: Blog, SEO, social media
- Email marketing: Newsletters, drip campaigns
- Referrals: Word-of-mouth, referral programs
- Direct sales: Outbound calls, demos
The CAC Payback Period
This metric shows how long it takes to recover your customer acquisition costs:
Payback Period = CAC ÷ Monthly Recurring Revenue per Customer
For SaaS businesses, a payback period of 12 months or less is generally considered healthy.
CAC vs. LTV: The Golden Ratio
The relationship between Customer Acquisition Cost and Customer Lifetime Value (LTV) is crucial:
- LTV:CAC ratio of 3:1 is generally considered healthy
- Below 1:1 means you're losing money on each customer
- Above 5:1 might indicate you're under-investing in growth
Improving Your CAC
Optimization Strategies
- Improve conversion rates: Better landing pages, clearer messaging
- Target better audiences: Use data to find your ideal customers
- Optimize your funnel: Remove friction from the customer journey
- Leverage referrals: Encourage satisfied customers to spread the word
- Focus on retention: Happy customers become your best marketers
Common CAC Mistakes
- Not tracking all costs: Missing hidden expenses like tools and salaries
- Ignoring time lag: Attribution should account for longer sales cycles
- Averaging across channels: Different channels have different CACs
- Forgetting about lifetime value: CAC means nothing without LTV context
Industry Benchmarks
CAC varies significantly by industry:
- SaaS: $1.32 for every $1 of new ARR
- E-commerce: 20-30% of first-year customer value
- Consumer apps: $1-5 for mobile apps
- B2B services: Often higher due to longer sales cycles
Tools for Tracking CAC
Modern businesses use various tools to monitor their customer acquisition costs:
- Google Analytics: Track conversion paths and attribution
- CRM systems: Monitor sales costs and conversion rates
- Marketing automation: Measure campaign effectiveness
- Our CAC Calculator: Get quick calculations and insights
Advanced CAC Analysis
Cohort-Based CAC
Track how CAC changes over time by analyzing customer cohorts. This helps identify:
- Seasonal trends
- Marketing effectiveness
- Channel performance evolution
Blended vs. Paid CAC
- Blended CAC: Includes all acquisition channels
- Paid CAC: Only includes paid marketing efforts
- Both metrics provide different insights into your acquisition strategy
Real-World Example
Let's say you run a SaaS company:
- Monthly marketing spend: $50,000
- Sales team costs: $30,000
- New customers acquired: 200
- Your CAC: ($50,000 + $30,000) ÷ 200 = $400
If your average customer pays $100/month and stays for 2 years:
- Customer LTV: $100 × 24 = $2,400
- LTV:CAC ratio: $2,400 ÷ $400 = 6:1
This healthy ratio suggests you could potentially invest more in customer acquisition.
Taking Action
Understanding your CAC is just the beginning. Use this knowledge to:
- Set acquisition budgets based on sustainable CAC levels
- Optimize underperforming channels or reallocate spend
- Experiment with new channels while monitoring CAC impact
- Report to stakeholders with confidence about your marketing ROI
Ready to calculate your own CAC? Use our Startup Calculator to get comprehensive financial calculations including CAC, LTV ratios, and burn rate analysis.