Customer Acquisition Cost (CAC) is the total expense incurred by a business to gain a new customer over a specific time period.
Customer Acquisition Cost, often abbreviated as CAC, is a critical business metric that calculates the full cost associated with convincing a potential customer to buy a product or service. To calculate it, you divide the total costs of sales and marketing by the number of new customers acquired during the same period. The formula is: CAC = (Total Sales & Marketing Costs) / (Number of New Customers Acquired). These costs are comprehensive and should include all related expenses. This encompasses direct advertising spend, salaries and commissions for marketing and sales teams, costs of creative production, software and tool subscriptions (e.g., CRM, marketing automation), and any relevant overhead. Being thorough in accounting for all costs is essential for an accurate CAC calculation. The effectiveness of this metric depends on a clearly defined time frame, such as a month, quarter, or year. Consistency in the calculation method and the included costs allows for meaningful comparisons over time, helping to track the efficiency of marketing efforts and business scalability.
CAC is a fundamental indicator of a company's profitability and financial health. It provides insight into the efficiency of marketing and sales strategies, showing how much the business must invest to grow its customer base. When analyzed alongside Customer Lifetime Value (LTV), CAC reveals the long-term viability of the business model. A healthy LTV to CAC ratio (often cited as 3:1 or higher) signifies that the value a customer brings over their lifetime far exceeds the cost to acquire them. This ratio helps businesses make informed decisions about budget allocation, channel optimization, and scaling operations. A high or rising CAC can signal problems with marketing efficiency or market saturation.
