WHAT IS CAC (CUSTOMER ACQUISITION COST)?

Customer acquisition cost (CAC) is the total amount of money a business spends to acquire a new customer. The abbreviation CAC stands for “customer acquisition cost.”

What is it about?

• What is the formula for calculating CAC?
• The connection between CAC and LTV
• How to improve Customer Acquisition Cost?
• Conclusions

What is the formula for calculating CAC?

The basic CAC formula looks like this:
CAC = MCC / CA, where MCC is the total marketing costs to acquire customers, and CA is the number of acquired customers.

To understand better, here’s an example:
Company A spent $100,000 on marketing efforts and $80,000 on sales in the last quarter. During that time, they acquired 500 new paying customers.
$180,000 / 500 = $360

That means Company X’s CAC for the quarter is $360.

Marketing costs (MCC) can include several components, allowing for an expanded CAC formula:

CAC = MCC + W + S + PS + O / CA

Here, the numerator includes:

• MCC = total marketing costs to acquire customers (excluding retention);
• W = salaries of marketers and sales team members;
• S = all software costs related to marketing and sales (marketing automation, A/B testing, analytics, etc.);
• PS = additional professional services in marketing and sales (e.g., designer, developer fees);
• O = other overhead expenses related to marketing and sales.

This comprehensive approach helps identify weak points in the sales or marketing strategy and which investments are least profitable. For example, designer services may be expensive but not essential. If visual design isn’t crucial for the target audience, switching the specialist or reducing time spent on visuals can improve CAC.

Marketing software costs may include subscriptions and tools like Google Ads or data collection platforms. Sales tools may include lead generation and email management systems.

Marketing costs (MCC) may also cover gifts for potential customers, lead magnets (free items, services, or educational content), expert consultations, product assistance, and printed materials (like guides or brochures for course students).

Let’s look at a few examples of companies that temporarily increase CAC as part of their growth strategy:

• A winery offering free tastings and branded giveaways after launching a new product line.
• A toy store giving out balloons on opening day.
• An IT company offering free demos and consultations to new users.
• A cosmetics brand testing the effect of a new face cream on problem skin.
• An internet provider giving new customers a free router with contract signing.
• A marketing agency conducting free audits of websites or ad campaigns.

We can’t evaluate sales or marketing effectiveness based on CAC alone. This metric should be viewed alongside others, especially LTV.

The connection between CAC and LTV

There is no perfect CAC value for every industry; the metric is relative. To understand if CAC is too high or too low, you need to compare it with the revenue from existing customers. The LTV:CAC ratio is one of the most important indicators of a company’s marketing and sales performance.

Customer lifetime value (LTV) is the total amount of money an average customer brings to a business during their entire lifecycle. The LTV:CAC ratio shows true profitability.

To calculate LTV, multiply the average time a customer uses the product/service by the profit they generate in that period.

Different LTV:CAC ratios show different insights:

• 1:1—the company is losing money.
• Less than 1:1—the company spends more than a customer is worth and may face financial trouble.
• 3:1—a healthy ratio, meaning customer relationships are strong and acquisition cost is optimized.
• Higher than 3:1—the company has room to invest more in acquisition.

“CAC and LTV are often compared, especially for SaaS companies. They help manage spending, forecast growth, plan next steps, and scale.”—“Customer acquisition cost”, Wikipedia

How LTV elements affect CAC

• Average customer lifespan
• Retention rate (how many customers return and buy again)
• Average spend per customer over their lifetime
• Profit margin per customer (net profit after CAC, divided by total revenue per customer)
• Average gross margin per customer (profit margin divided by 100, multiplied by total customer spend)

Knowing your exact LTV helps you understand which CAC investments are worth it. If customers keep coming back, it may be smart to invest more in acquisition, even if CAC increases.

How to improve Customer Acquisition Cost?

Understanding CAC helps businesses evaluate their return on investment (ROI). According to McKinsey & Company, going digital with sales boosted customer acquisition efficiency by 30%.

But moving online isn’t enough. Competing online means regularly analyzing CAC.

Several factors affect CAC, including business maturity. High CAC is common for young businesses. Older companies have lower CAC due to proven strategies.

“Launching a new business, entering a new market, or testing a new strategy usually increases CAC in the short term. But that doesn’t mean it’s not worth doing.”—“Customer acquisition cost formula and tips to improve your CAC,” Court Bishop, Zendesk Blog

How to improve CAC?

1. Define and optimize payback period
   Aim to recover CAC as quickly as possible.
2. Optimize pricing strategy
   Charge upfront when possible to offset CAC (e.g., setup or training fees).
3. Speed up lead acquisition
   Use automation tools, ensure fast feedback, and maintain clear communication with prospects.
4. Align strategy with target audience preferences
   Analyze buyer behavior through the funnel and offer what captures attention early.
5. Share customer reviews
   Use testimonials and case studies to attract more leads. Share insights with product and service teams.
6. Analyze marketing channels
   Track spending per channel (e.g., CPC, CPL, subscriber cost by platform). Focus on profitable channels and stop wasting money on underperforming ones. Use tools like Google Analytics to track lead drop-off and abandoned carts.
   Most businesses should spend no more than 33% of a customer’s LTV on acquiring that customer.
   

Conclusions

Some business owners are overly cautious with CAC, which can hold back brand growth. Sometimes, even high CAC leads to future profits. But constant CAC growth without measuring effectiveness can cause failure.

Balancing CAC and LTV optimizes marketing and sales costs. Marketers, arbitrage specialists, and business owners aim to invest in acquisition without harming customer lifetime value (LTV) or per-customer profit.

The LTV:CAC ratio is a core metric for many companies, especially SaaS providers. A strong business model means CAC is much lower than LTV. But CAC behaves like a pendulum—it changes at different stages of growth.

Frequently asked questions