Customer Acquisition Cost

Customer acquisition cost (CAC) is everything you spend, on average, to win one new customer. Unlike cost per acquisition, it covers not only ad spend but your entire marketing and sales effort.

Formula

CAC = (marketing costs + sales costs) ÷ number of new customers

Always use the same time period for costs and new customers – for example, one quarter.

Example

An insurance broker has the following costs in one quarter:

• Ad spend: $9,000
• Agency: $3,000
• Share of sales salaries: $12,000
• Tools: $1,000

That is $25,000 in total. During the quarter, the broker wins 50 new customers.

CAC = $25,000 ÷ 50 = $500

The CPA from the ad account would be just $9,000 ÷ 50 = $180 – significantly underestimating the true cost per customer.

CAC and customer lifetime value

On its own, CAC tells you little. Only when you compare it to customer lifetime value (CLV) do you see whether acquiring customers pays off. If a customer brings in $2,000 in contribution margin over their lifetime, $500 CAC is money well spent. If they bring in $400, you lose money on every new customer.

Payback period matters too: how many months does it take for a customer to earn back their acquisition cost? For subscription businesses in particular, it determines your cash flow.

CAC in lead generation

Your accounting is enough for overall CAC. But to understand which channels and campaigns make customers cheap or expensive, you need to attribute every new customer to its source. LeadMetrics links leads to their campaign and to deals in your CRM, such as HubSpot or Close, and shows the cost per deal by channel, campaign and ad. That ad-driven cost per customer is the basis on which you can allocate your fixed costs.

Common mistakes

• Counting only ad spend: That gives you CPA, not CAC.
• Including existing customers: Upsells and renewals are not new customers.
• Ignoring time lag: With long sales cycles, this month's spend often produces customers next month.