What Is Customer Acquisition Cost (CAC)?
CAC is what you spend to win one new customer. Keep it in check or growth destroys value instead of creating it.
Key Takeaways
- CAC = Total Sales & Marketing Spend ÷ New Customers Acquired.
- CAC must be compared to CLV to determine whether acquisition economics make sense.
- A CLV:CAC ratio of 3:1 or higher is typically the minimum for a healthy business.
The formula
Customer Acquisition Cost is total sales and marketing spend divided by the number of new customers acquired in the same period. If you spend £20,000 on marketing in a month and acquire 100 new customers, CAC is £200. Every element of the sales and marketing cost base should be included: ad spend, agency fees, salaries in sales and marketing, tools, events, referral fees.
CAC by channel
Overall CAC is an average across all channels — and averages can hide poor performers. Calculate CAC by channel: paid search, paid social, organic, referral, direct. You may find that one channel generates customers at £50 CAC while another costs £500. This directly informs where to invest and where to cut.
The CLV:CAC ratio
CAC in isolation is meaningless — it must be compared to what that customer will generate over their lifetime (CLV). A CLV:CAC ratio of 3:1 is often cited as a minimum healthy threshold. Below 1:1 means you're spending more to acquire customers than they will ever generate. Above 5:1 may indicate underinvestment in growth.
CAC payback period
CLV:CAC ratio is a long-term view. CAC payback period — how many months of customer revenue it takes to recoup the acquisition cost — is a cash flow view. A 12-month payback means you spend the marketing cost now and recover it in 12 months of customer revenue. The shorter the payback period, the faster you can reinvest and the less capital you need to fund growth.