Defining Customer Acquisition Cost (CAC)
Customer Acquisition Cost (CAC) is a critical business metric representing the total average cost your company spends to acquire a new customer. It encompasses all sales and marketing expenses—including salaries, commissions, ad spend, tool costs, and overhead—incurred over a specific period, divided by the number of new customers gained during that same period.
Essentially, CAC answers the question: **How much does it cost us, on average, to bring in one new paying customer?**
The Basic Formula
The most straightforward way to calculate CAC is:
CAC = (Total Sales Costs + Total Marketing Costs) / Number of New Customers Acquired
Both the costs and the number of new customers should correspond to the same time frame (e.g., monthly, quarterly, annually).
Why is CAC Important?
Understanding and tracking your CAC is vital for several reasons:
- Profitability Analysis: Comparing CAC to the Customer Lifetime Value (LTV) helps determine if your customer acquisition strategy is profitable in the long run. Ideally, LTV should be significantly higher than CAC (a common benchmark is LTV > 3x CAC).
- Marketing & Sales Efficiency: CAC helps measure the effectiveness of your marketing campaigns and sales efforts. High or increasing CAC might indicate inefficient spending or targeting issues.
- Budgeting & Forecasting: Knowing your average CAC allows for more accurate budgeting for future growth and forecasting potential returns on marketing investments.
- Investor Confidence: Investors often look at CAC and its relationship with LTV as key indicators of a business's health and scalability.
Simple Calculation Example
Let's say in one quarter (3 months), a company spends:
- $15,000 on marketing salaries and ad spend
- $25,000 on sales salaries and commissions
During that same quarter, they acquired 200 new customers.
Total Costs = $15,000 (Marketing) + $25,000 (Sales) = $40,000
Their CAC for that quarter would be:
CAC = $40,000 / 200 New Customers = $200 per customer
This means, on average, it cost the company $200 to acquire each new customer during that quarter. For a more hands-on calculation, try our Simple Blended CAC Calculator. Remember to define your terms consistently - see our Glossary for more details.
Now that you understand what CAC is, learn why tracking it consistently is crucial for your business.