Customer acquisition cost (CAC)

What goes into the cost

Count everything you spent to win customers in the period: ads, sponsorships, paid launch placements, tools for marketing and sales, and the salaries or contractor fees of the people doing that work. Leaving out salaries makes CAC look far lower than it is. Founders who do all the marketing themselves often leave their own time out, which is fine early on as long as you know the number is flattering.

Blended CAC divides all spend by all new customers, including the ones who found you through word of mouth or search. Paid CAC divides ad spend by the customers those ads brought in. Paid CAC tells you whether a channel works. Blended CAC tells you whether the business works.

CAC payback and the LTV to CAC ratio

CAC on its own means little. Compare it with what a customer is worth. CAC payback is the number of months a customer takes to pay back their acquisition cost: CAC ÷ (monthly revenue per customer × gross margin). Many subscription businesses aim for under 12 months.

The other common check is customer lifetime value divided by CAC. A ratio of about 3 to 1 is the usual rule of thumb. Below 1 to 1, every new customer loses money.

Measuring it by channel

Tag every link you share with UTM parameters, so sign-ups and payments can be traced back to the launch platform, newsletter or ad that sent them. Then work out CAC for each channel and move money and time towards the cheapest ones that bring customers who stay.

Example

In one quarter a startup spends $4,500 on ads, $1,500 on a sponsored newsletter and $6,000 on a part-time marketer, $12,000 in total. It wins 80 new customers. Blended CAC is $12,000 ÷ 80 = $150. Each customer pays $40 a month at an 80 percent gross margin, so CAC payback is $150 ÷ ($40 × 0.8) = about 4.7 months.

Questions people ask

Is CAC the same as cost per acquisition (CPA)?

Not quite. CPA in advertising usually means the cost of one action, such as a sign-up or a trial. CAC means the cost of one paying customer, across all sales and marketing spend.

How do I lower CAC?

Raise conversion at each step from visit to payment, focus on channels that bring your ideal customers, and build sources that keep working without new spend, such as search traffic, referrals and listings on launch platforms.