Customer Acquisition Cost (CAC) is the total expense a business incurs to acquire a new customer, including all marketing and sales costs. It's a fundamental metric for evaluating marketing efficiency and business sustainability.
Calculating CAC
The basic formula for CAC is:
CAC = Total Sales & Marketing Costs / Number of New Customers Acquired
For example, if a company spends $10,000 on marketing and sales in a month and acquires 100 new customers, the CAC is $100 per customer.
Components of CAC
- Marketing expenses: Advertising costs, content creation, SEO, social media, events
- Sales expenses: Sales team salaries, commissions, CRM costs, sales tools
- Overhead costs: Portion of office space, administrative costs related to sales/marketing
- Technology costs: Software and tools used for marketing and sales activities
CAC benchmarks and optimization
- Industry benchmarks: CAC varies widely by industry and business model (B2B typically higher than B2C)
- CAC:LTV ratio: Customer Lifetime Value should be at least 3x CAC for a sustainable business
- Payback period: Time to recover the cost of acquiring a customer (ideally under 12 months)
- Improvements: Optimize conversion rates, referral programs, targeted marketing, pricing strategy
Why CAC matters
- Resource allocation: Helps determine budgeting across marketing channels
- Business viability: Unsustainable CAC can drain company resources
- Growth planning: Crucial for forecasting and scaling decisions
- Investor relationships: Key metric evaluated by investors and venture capitalists
Understanding and optimizing CAC is essential for sustainable growth in SaaS and subscription-based businesses, where upfront acquisition costs must be balanced against the long-term value generated by each customer.
