Definition of Customer Acquisition Cost (CAC)
Customer Acquisition Cost (CAC) is the average cost a company incurs to acquire a new customer. It is calculated by dividing total sales and marketing expenses over a given period by the number of new customers acquired in that same period. CAC represents how much a business must invest to convert a prospect into a paying customer.
What CAC Includes
CAC typically includes all costs directly related to acquiring customers. This can include advertising spend, paid marketing campaigns, sales team salaries and commissions, marketing and sales software, agency fees, events, content production, and any other expense tied to lead generation, nurturing, and conversion.
How CAC Is Calculated
The basic formula for CAC is total sales and marketing spend divided by the number of new customers acquired. For example, if a company spends $100,000 on sales and marketing in a quarter and acquires 50 new customers, the CAC for that period is $2,000 per customer.
CAC Explained for a General Audience
CAC tells a company how much money it spends to win each new customer. If a business spends a lot to attract customers, those customers must generate enough revenue over time to justify the cost. Lower CAC generally means more efficient growth, but CAC is only meaningful when compared to how valuable the customer is over time.
CAC and Customer Value
CAC is almost always evaluated alongside Customer Lifetime Value (LTV). A high CAC can be perfectly acceptable if customers generate significant long-term revenue. Conversely, a low CAC can still be problematic if customers churn quickly or spend very little. A common benchmark in SaaS is aiming for an LTV-to-CAC ratio of 3:1 or higher.
CAC Payback Period
CAC is closely linked to payback period, which measures how long it takes for a company to recover the acquisition cost through customer revenue. For example, if CAC is $200 and the customer pays $100 per month, the payback period is two months. Shorter payback periods reduce financial risk and free up capital faster.
Channel-Level CAC
More advanced companies calculate CAC by channel to understand which acquisition sources are most efficient. Paid ads, outbound sales, partnerships, and organic channels often have very different CAC profiles. This helps teams reallocate budget toward the most profitable growth channels.
CAC and Cash Flow
CAC often requires upfront cash investment, while revenue is realized over time. This creates cash flow pressure, especially in subscription businesses with monthly billing. Improving cash flow or shortening payback periods allows companies to reinvest in acquisition more aggressively without raising additional capital.
CAC in Scaling Businesses
As companies scale, CAC often rises due to increased competition, market saturation, or diminishing returns on early growth channels. Monitoring CAC trends over time helps leadership understand when growth is becoming less efficient and whether pricing, positioning, or go-to-market strategy needs adjustment.
Summary
Customer Acquisition Cost represents the cost of growth. It measures how efficiently a company turns marketing and sales investment into customers. Healthy businesses ensure CAC is well below the long-term value generated by customers, monitor payback periods closely, and continuously optimize acquisition efficiency to sustain profitable growth.
