Customer Acquisition Cost (CAC)

What is Customer Acquisition Cost?

Customer acquisition cost (CAC) is the cost associated with acquiring each customer. It can vary depending on your marketing and sales teams’ efforts. Essentially, calculating your CAC means adding up all your sales and marketing expenditures and dividing them by the number of new customers for the period. 

How to calculate CAC

CAC = Total marketing and sales spend (salaries, tools, ads, etc.) / Number of customers converted

See also: Customer Lifetime Value (CLV)

Why you should track CAC

CAC becomes important when you’re able to compare it to the revenue a customer brings in over the lifetime of their relationship with you. This revenue is called the Customer Lifetime Value (CLV). 

If your CAC for a customer is high and the same customer has a low lifetime value, you probably need to find customers that are a better fit. Balancing CAC with LTV can help you make smarter marketing and sales decisions and create more profitable models for your team. 

Best practices and things to keep in mind

1. The simple formula used to calculate CAC, i.e., dividing the total marketing and sales expenditure by the number of customers, could pose an issue in case your business is in the early stages. Your initial marketing and sales costs are bound to be high, causing the CAC to be high. However, as the business evolves and scales, the same team will be able to handle more customers at scale. In the early stages, you could take only a portion of salaries and expenses to give a better indication of how CAC will look in the future when you are at scale.
2. The higher your LTV and the lower your CAC, the faster your business can grow.  A good rule of thumb is if your LTV/CAC is less than 3, you’re spending too much on acquisition.