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CAC (customer acquisition cost)

Also called: customer acquisition cost, acquisition cost

What it costs on average to win one new paying customer: sales and marketing spending for a period ÷ new customers in that period. A healthy business earns back CAC well within the customer's lifetime.

CAC (customer acquisition cost) is what it costs on average to win one new paying customer: CAC = sales and marketing spending in a period ÷ new paying customers in that period. "Spending" should be fully loaded: ads, events, referral rewards, sales tools, and the pay of the people who sell, including the founders' own time if it replaces someone you'd otherwise have to pay.

On its own CAC says little; it matters next to what a customer brings in. The two standard comparisons are the LTV:CAC ratio (how many times a customer pays back what it cost to win them) and the CAC payback period (how many months of gross profit it takes to earn CAC back). A CAC of 2,000 is excellent if customers pay 750 a month for two years and terrible if they pay 100 a month.

It also helps to calculate CAC by channel. Referrals, a community and founder-led sales in a small niche often have a far lower CAC than paid ads, but they don't scale in a straight line: the first 50 customers from a city's repair-shop owners come cheaper than the next 50. Watch how CAC changes as a channel grows, not just its average.

Example

From February of year 2 GarageDesk runs a referral program: when a new shop signs up through another shop's link and pays, both get one free month. Most recommenders pay 600 UAH and new shops 750 UAH, so one referral costs 600 + 750 = 1,350 UAH of revenue.

By the end of May 20 shops have signed up through referral links, but 5 of them were about to sign up anyway. Total cost 20 × 1,350 = 27,000 UAH, shops really added 20 − 5 = 15: an honest CAC of 27,000 / 15 = 1,800 UAH per shop, against about 5,000 UAH per shop from ads.

Common mistakes

  • Counting only ad spend. Salaries, tools, events and referral rewards are part of acquisition too.
  • Treating founder time as free. It isn't free once you have to hire someone to do the selling.
  • Dividing by sign-ups instead of paying customers. Free trials that never pay make CAC look cheap.
  • Blending all channels. One cheap channel can hide an expensive one that's getting worse.