What customer acquisition cost means
Customer acquisition cost (CAC) is what you spend, on average, to win one new customer. It turns a marketing and sales budget into a number you can hold against what a customer is worth: if a new customer costs more to win than they will ever bring in, growth only makes the losses bigger.
A company that spends $24,000 on ads, $30,000 on sales and marketing salaries, $3,500 on tools, $6,000 on an agency and $1,500 on other costs in a quarter has $65,000 of acquisition costs. If that quarter brings 260 new customers, the CAC is 65,000 ÷ 260 = $250.00.
What to include
The most common mistake is counting only the ads. A fully loaded CAC includes everything you spend to win customers:
- Ad spend on search, social, display, video, podcasts and sponsorships.
- Salaries, commissions and bonuses of the people in marketing and sales, plus their share of benefits and payroll taxes if you want the full picture.
- Tools such as your CRM, email platform, analytics and design software.
- Agencies and freelancers for ads, content, SEO or design.
- Other costs like events, trade shows, printed material, and the discounts, credits and referral rewards you give new customers.
Andreessen Horowitz makes the same point in its guide to startup metrics: CAC should be the full cost of acquiring a customer, and referral fees, credits and discounts belong in it. Leave out costs that serve existing customers, like support or account management, unless you also count the upgrades they bring as new business.
Blended CAC and paid CAC
The headline result is a blended CAC: all costs divided by all new customers, whether they came from an ad, a search result, a referral or a friend’s recommendation. It tells you what growth costs overall.
Paid CAC divides ad spend by only the customers your ad platforms or analytics credit to paid campaigns. In the example, $24,000 of ad spend brought 150 customers, a paid CAC of $160.00. Spread over all 260 new customers, the same ad spend looks like only $92.31 each, because the 110 customers who came on their own make the ads look cheaper than they are. That is why Andreessen Horowitz notes that investors consider paid CAC more important than blended CAC: it shows whether the paid campaigns pay off on their own and what more ad money would buy.
Paid CAC here uses ad spend only. If you want a fully loaded paid CAC, add the salaries, agency fees and tools that only serve your paid campaigns to the ad spend.
CAC examples
Made-up businesses to show the math, not benchmarks.
| Business | Costs | New customers | CAC | Revenue and margin a month | Payback |
|---|---|---|---|---|---|
| Online store | $12,000 | 400 | $30.00 | $45 at 40% | 1.7 months |
| Software subscription | $90,000 | 150 | $600.00 | $99 at 80% | 7.6 months |
| Local gym | $4,500 | 60 | $75.00 | $50 at 60% | 2.5 months |
| Marketing agency | $36,000 | 12 | $3,000.00 | $2,500 at 50% | 2.4 months |
| Meal kit service | $60,000 | 1,500 | $40.00 | $120 at 30% | 1.1 months |
A high CAC is not automatically a problem. The agency pays $3,000 per client and earns it back in 2.4 months, because each client brings in a lot every month. The software subscription pays a fifth of that, $600, yet needs 7.6 months. What matters is how the cost compares with what a customer brings in.
CAC payback period
Payback tells you how long your money is tied up in each new customer. With a $250.00 CAC, $60 a month in revenue and a 75% gross margin, each customer earns $45.00 of gross profit a month and pays back in $250.00 ÷ $45.00 = 5.6 months.
Use gross profit, not revenue: a customer paying $60 a month does not return $60 a month if delivering the product costs you part of it. Payback also assumes the customer stays that long. If customers typically leave before the payback month, the average one never earns back what they cost. For SaaS businesses, David Skok suggests in his SaaS Metrics 2.0 article that payback should be under 12 months, and adds that the guideline dates from 2011 and that longer paybacks can work, for example for enterprise companies whose customers expand over time.
LTV to CAC ratio
The ratio compares what a customer is worth over the whole relationship with what it cost to win them. A customer lifetime value of $1,200 against a $250.00 CAC gives 4.8:1. Below 1:1 every new customer loses money.
A ratio of 3:1 is a common rule of thumb. Andreessen Horowitz writes that investors often use 3x LTV to CAC as a rough benchmark of a consumer company’s financial health, and David Skok gives above 3 as his guideline for a successful SaaS business, assuming gross margins of 80% or more. Treat it as a starting point: a very high ratio can also mean you are spending too little to grow. To work out the lifetime value, use the customer lifetime value calculator.
How to lower CAC
- Raise the conversion rate. Every visitor who becomes a customer instead of leaving lowers the cost of all the others. The conversion rate calculator shows what a higher rate is worth.
- Move budget to the channels that work. Calculate CAC per channel where you can, and shift money from the expensive ones to the cheap ones until they even out.
- Grow the free channels. Referrals, search traffic and word of mouth bring customers without a media bill, which lowers the blended CAC.
- Shorten the sales cycle. Fewer calls, demos and follow-ups per deal mean fewer sales hours per customer.
Common mistakes
- Counting only ad spend. It hides salaries, tools and agencies and makes acquisition look cheaper than it is.
- Mismatched periods. Costs from one month and customers from another give a random number. A quarter evens out lumpy costs and the delay between first contact and purchase.
- Counting returning customers as new. Repeat buyers and reactivated accounts did not cost a full acquisition. Count only first-time customers.
- One CAC for everything. A blended number hides an expensive channel behind a cheap one. Look at paid CAC and, where you can, CAC per channel.
To see whether a single ad campaign makes money on its first sale, use the ROAS calculator.
How to use the CAC calculator
- 1Choose Itemized to enter ad spend, salaries, tools, agencies and other costs, or One total if you already have the sum.
- 2Enter the new customers you won in the same period and, for paid CAC, how many of them came from ads.
- 3Add monthly revenue per customer and your gross margin for the payback period, and your customer lifetime value for the LTV to CAC ratio.
- 4Read the CAC and the cost split per customer, then copy the result or a link to share it.
Frequently asked questions
How do you calculate customer acquisition cost?
Add up everything you spent on sales and marketing in a period, then divide by the number of new customers you won in that period. With $65,000 of costs and 260 new customers, CAC = 65,000 ÷ 260 = $250. Count ad spend, salaries and commissions, tools, agencies and other campaign costs, not only the ads.
What is the difference between blended and paid CAC?
Blended CAC divides your costs by all new customers, including the ones who found you through search, word of mouth or social posts without paid ads. Paid CAC divides ad spend by only the customers who came from paid campaigns. Blended CAC is usually lower because free customers pull it down; paid CAC shows what it costs to buy one more customer through ads.
Should salaries be part of CAC?
Yes, for a fully loaded CAC. The pay, commissions and bonuses of the people who market and sell are part of what it costs to win customers, often a large part. Leaving them out makes acquisition look cheaper than it is. If someone splits their time with other work, count only the share spent on winning new customers.
What is a good CAC?
A good CAC is one that a customer earns back with room to spare. That is why CAC is judged next to two other numbers: how many months of gross profit it takes to pay it back, and the ratio of customer lifetime value to CAC. A $600 CAC can be fine for a subscription that keeps customers for years and far too high for a store with one small order.
What is CAC payback?
The number of months a new customer needs to earn back what it cost to win them. Divide CAC by the monthly revenue per customer times your gross margin. A $250 CAC with $60 a month in revenue at a 75% margin pays back in 250 ÷ 45 = 5.6 months. A shorter payback means your money comes back sooner and can be spent on the next customer.
What is a good LTV to CAC ratio?
A ratio of 3:1 is a common rule of thumb: a customer should bring in about three times what it cost to win them. Andreessen Horowitz writes that investors often use 3x LTV to CAC as a rough benchmark for consumer companies, and David Skok suggests above 3 for SaaS businesses. Below 1:1 you lose money on every new customer.
Which period should I use?
Use a month or a quarter, the same one for costs and customers. A quarter smooths out lumpy costs such as a trade show or a yearly software bill, and it helps when customers take a few weeks to decide after the marketing that reached them.