Customer Acquisition Cost

Customer acquisition cost, often shortened to CAC, is calculated by dividing the total amount spent on sales and marketing over a period by the number of new customers gained in that period.

For example, if a company spends 50,000 on advertising, promotions and sales staff in a month and gains 500 new customers, its customer acquisition cost is 100 per customer.

CAC is especially important for subscription businesses, online companies and start-ups. A business is only sustainable if the value a customer brings over time, the customer lifetime value, is comfortably higher than the cost of acquiring them. Many businesses aim for lifetime value to be at least three times acquisition cost.

Rising CAC can be a warning sign. It may mean that the most interested customers have already been reached, competition for customers is increasing or marketing is becoming less effective.

Businesses try to lower CAC through better targeting, word-of-mouth referrals, improving conversion rates and building strong brands that attract customers with less spending.