Customer Acquisition Cost (CAC)

Marketing · 3 min read

The total cost of convincing one person to become your customer. Spend more than they're worth and you're paying people to take your product.

In its simplest form, the math of any business is two numbers: what does it cost to get a customer, and what is that customer worth?

The first number is Customer Acquisition Cost. CAC.

The basic calculation is straightforward: take everything you spent on marketing and sales in a given period, and divide by the number of new customers you got in that period.

CAC = Total sales & marketing spend ÷ New customers acquired

So if a software company spends $100,000 on Facebook ads, Google ads, sales reps, and content marketing in a quarter, and acquires 500 new customers in that same quarter, their CAC is $200. They spent $200, on average, to acquire each customer.

On its own, that number means almost nothing. Is $200 expensive? Cheap? Catastrophic? Brilliant? It depends entirely on what those customers are worth, which is where Customer Lifetime Value comes in. CAC and CLV only mean anything when looked at together.

If each customer is worth $2,000 over their lifetime, then a $200 CAC is excellent. You're making $10 for every $1 you spend acquiring them. That's a healthy ratio (the rough rule of thumb in SaaS is that CLV should be at least 3x CAC).

If each customer is worth $150, that same $200 CAC is a disaster. You're paying $50 to give your product away. Every new customer makes your business worse, not better. Companies have famously gone bankrupt doing this — pouring venture capital into growth that was structurally unprofitable. (See: every meal kit delivery company that promised to be the next Netflix and discovered customers don't watch food.)

CAC also creeps. The first 1,000 customers are cheap to acquire — they're your friends, your early enthusiasts, the people who would have found you anyway. The next 10,000 cost more because you need ads. The next 100,000 cost more again because you've exhausted the easy channels and you're now competing for attention with everyone else. This is why startups that look profitable at small scale often aren't at large scale.