What it means
Every customer a business wins has been paid for, whether by advertising that brought them in, a salesperson who persuaded them, a discount that converted them or a referral programme that rewarded whoever sent them. CAC adds up what was paid and divides by how many were won.
It answers the question every growth plan depends on: what does it cost us to add a customer, and is the customer worth it? The definition's completeness is the first issue.
A narrow CAC counts only media spend; a full one counts everything the business spends to acquire customers: paid advertising across all channels, content and creative production, marketing technology and data, marketing staff salaries and overhead, agency and consultant fees, sales staff salaries, commissions and expenses, sales tools and enablement, events and sponsorship, partner and affiliate commissions, referral rewards, introductory discounts and free trial costs, and the onboarding effort needed to convert a signed customer into an active one. Businesses that count only media report a CAC that may be half the true figure, and the growth plans built on it fail when the full cost is applied.
Costs of serving and retaining existing customers (account management, support, retention marketing) are excluded, since they are the cost of keeping customers rather than winning them, though the boundary requires judgement for staff who do both. The denominator's definition is the second issue.
New customers should mean customers who have paid, or who have passed the point at which the business's economics count them: a signed contract, a first order, a converted trial. Counting sign-ups, leads or free users as customers inflates the denominator and flatters CAC.
Attribution is the third. Customers are won by combinations of activities over time, and assigning each to a channel is imperfect; blended CAC (total cost over total new customers) is reliable and channel CAC (channel cost over customers attributed to it) is useful for allocation but sensitive to the attribution model.
Businesses use both and treat the channel figures as directional. The judgement is against value.
First-purchase contribution shows whether the customer pays for themselves immediately; few do in subscription or repeat-purchase businesses. Lifetime value (contribution per period times expected lifetime, or per period contribution divided by churn rate) shows whether they pay over time; the LTV to CAC ratio expresses the return, and the payback period shows how long the business must fund the gap.
Investors in growth businesses focus on both because a high LTV to CAC ratio with a long payback consumes cash faster than the business can raise it, while a short payback with a low ratio produces customers who leave before they become valuable. CAC moves.
It falls as the business learns its channels and builds brand and referrals; it rises as the business exhausts the most receptive audience and pays more for the marginal customer; it rises when competitors bid for the same channels; it falls when product improvements raise conversion. Tracking CAC by cohort (customers won in each month, with their channel, cost and subsequent behaviour) shows the trend and the quality of the customers each period's spend bought.
In practice
Real-world examples.
Example
An online retailer's fully loaded CAC is $45 against a first-order contribution of $30 and a repeat rate that gives a lifetime value of $110: a ratio of 2.4 and a payback of eight months.
Example
A bank's cost to acquire a current account customer is $180 through digital channels and $60 through branch referrals, and the branch-acquired customers have higher balances.
Example
A subscription box company's CAC rises from $35 to $70 over two years as its social advertising audience saturates, and its LTV to CAC ratio falls below 2.
Think of it
“CAC is how much you spend to get each new customer-your cost to win new business.
Formula
Calculation
Customer Acquisition Cost = Total sales and marketing cost of acquisition in the period / New customers acquired in the period
Channel CAC = Channel's acquisition cost / New customers attributed to the channel
Customer Lifetime Value (simple) = Contribution per customer per period / Churn rate per period (or Contribution per period x Expected lifetime in periods)
LTV to CAC Ratio = Lifetime value / CAC
CAC Payback (months) = CAC / Monthly contribution per customer
Marginal CAC = Additional acquisition cost / Additional customers won from that spend
Worked example. A business-to-business software company sells a subscription at $400 a month with a gross margin of 80% (contribution $320 a month per customer). Monthly churn 2.0% (average customer life 50 months). Quarter's figures:
Acquisition costs: paid search and social $210,000; content, SEO and creative production $60,000; marketing team (4 staff) $110,000; marketing technology and data $25,000; sales team (6 sales development and account executives) salaries $240,000; commissions $75,000; sales tools $15,000; events and webinars $40,000; partner referral fees $30,000; free trial hosting and onboarding support for trials $35,000. Total $840,000.
New paying customers in the quarter: 420 (from 2,100 trials; trial-to-paid 20%).
CAC = $840,000 / 420 = $2,000.
Lifetime value = $320 x 50 = $16,000 (or $320 / 0.02 = $16,000).
LTV to CAC = 8.0.
Payback = $2,000 / $320 = 6.25 months.
By channel (attribution by first meaningful touch, with shared costs allocated by customers won): paid search 180 customers at $2,900 (it carries most of the media cost); content and organic 110 customers at $1,100; partners 60 customers at $1,600; events and outbound sales 70 customers at $2,600. The company plans to shift budget from paid search towards content and partners, subject to their capacity to scale.
Narrow versus full definition: the marketing team's own report showed CAC of $500 (media $210,000 over 420 customers), and the board's growth plan had assumed $600. The full figure of $2,000 changes the plan: at $600, the company could afford to grow at any rate its cash allowed; at $2,000, with a 6-month payback, growing from 420 to 800 customers a quarter would require $1,600,000 of quarterly acquisition spend funded for six months ahead of recovery, which the company's cash cannot cover without a raise.
Cohort check: the customers acquired two years earlier at a CAC of $1,400 churned at 1.5% a month (LTV $21,000, ratio 15); the most recent cohort churns at 2.4% in its first six months. CAC has risen 40% and early churn has worsened; the marginal customer is both more expensive and less valuable. The company's response is to tighten trial qualification (fewer, better trials) and to measure trial-to-paid and 6-month retention by channel, since the channel with the cheapest CAC (partners) also shows the highest early churn, which the channel CAC alone did not reveal.
Marginal analysis: the last $60,000 of paid search spend in the quarter won 18 customers: marginal CAC $3,300, payback 10.4 months. Still within the company's 12-month limit, but the next increment would likely exceed it; paid search is at its efficient scale for now.Case study
Seen in the real world.
A meal-planning app raised $15,000,000 on a pitch showing CAC of $12 and lifetime value of $60, a ratio of 5. The CAC was calculated as media spend over app downloads. The investors' post-investment analysis rebuilt it: media spend over paying subscribers (not downloads; 8% of downloads subscribed) gave $150; adding the marketing team, agency, creative, referral credits and the free month gave $240; and the lifetime value, recalculated on actual churn of 9% a month rather than the pitch's assumed 4%, was $130.
The ratio was 0.54: the company lost money on every subscriber and would lose more the faster it grew. The board halted paid acquisition, rebuilt the product to improve retention (churn fell to 5% over a year, LTV to $230), rebuilt the acquisition model around referral and content (CAC $95), and relaunched paid acquisition only in the channels whose cohort payback was under nine months.
The company reached break-even two years later at a third of the subscriber growth rate in the original plan. Its chief executive told the next round's investors that the first pitch had been arithmetic on the wrong numbers, and that the company's real business had begun when it had learned what a customer cost and what a customer was worth.
Watch out
Common mistakes.
- Calculating CAC on media spend alone and on sign-ups or downloads rather than paying customers, which can understate the true figure several times over.
- Comparing CAC with revenue rather than contribution, and with a lifetime value built on assumed rather than observed churn.
- Scaling acquisition spend on average CAC when marginal CAC has risen past the value of the customers it buys.
Questions
People also ask.
What is a good customer acquisition cost?
One that the customer's lifetime value covers at least three times over, with a payback the business can fund, conventionally under twelve months for subscription businesses. Absolute levels vary from a few dollars to tens of thousands by business.
What should be included in CAC?
All costs of winning new customers: media, content, marketing staff and tools, agencies, sales staff, commissions, sales tools, events, partner and referral payments, introductory discounts and trial costs. Costs of serving and retaining existing customers are excluded.
How does CAC change as a business grows?
It usually falls at first as channels are learned and brand builds, then rises as the receptive audience is exhausted and competitors bid for the same channels. Cohort tracking and marginal CAC show the trend; the average lags it.
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