What is CAC? How to calculate and lower customer acquisition cost

Customer acquisition cost (CAC) is the average amount you spend on sales and marketing to win one new paying customer. To calculate it, add up your sales and marketing costs for a period and divide by the number of new customers you won in that period. Compare it with what a customer is worth to see whether your growth is profitable.

For a short definition, see our glossary entry on customer acquisition cost.

Why does CAC matter?

CAC tells you how much growth costs. It helps you:

• See whether your marketing and sales spend pays off
• Compare channels, campaigns and sales teams
• Set budgets, because you know roughly what each new customer will cost
• Spot problems early, when costs rise faster than customers

It matters most for businesses that depend on a steady flow of leads, such as SaaS companies, agencies and insurance brokers. Winning a lead is one cost, and turning that lead into a customer is another. CAC captures both. Track it alongside your other marketing KPIs.

What is the CAC formula?

CAC = total sales and marketing costs / number of new customers

Both numbers must cover the same period. If you spent $30,000 on sales and marketing in a quarter and won 60 new customers, your CAC is $500.

Many teams use two versions:

• Simple CAC counts marketing spend only, mostly ads and campaigns.
• Full CAC adds sales and marketing salaries, software, agencies, freelancers and related overheads. It gives a truer picture, especially in B2B, where sales reps work most deals.

Which costs should you include in CAC?

Include everything you spend to win new customers, and nothing you spend to make or deliver the product.

Marketing costs

• Advertising spend on search, social, display and sponsorships
• Content and creative production, such as writers, designers and video
• Marketing software, such as email, automation, analytics and testing tools
• Events and trade shows
• Website costs that support acquisition
• Agencies, consultants and freelancers
• Marketing salaries

Sales costs

• Sales salaries and commissions
• Sales tools, such as CRM seats and prospecting data
• Travel and entertainment for winning deals
• Referral fees, sign-up credits and discounts given to win customers

Andreessen Horowitz points out that teams often leave out referral fees, credits and discounts, which makes CAC look lower than it is.

What not to include

Production costs, materials and the cost of delivering your service are cost of goods sold. They affect your gross margin and customer lifetime value, not your CAC. Spending on existing customers, such as account management for renewals, is also usually kept out, so CAC reflects new customers only.

How do you calculate customer acquisition cost in three steps?

Step 1: Choose a time period

Pick a period that suits your sales cycle. Smaller companies with short sales cycles often track CAC monthly. Companies with longer B2B sales cycles usually track it quarterly, so that the spending and the deals it produced fall in the same period.

Step 2: Add up your sales and marketing costs

List every cost from the categories above for that period. Good bookkeeping helps: tag costs by channel and team so you can later calculate CAC per channel too. A periodic marketing audit is a good moment to check that nothing is missing.

Step 3: Divide by the number of new customers

Count only new paying customers won in the period. Then track the result over time and by channel.

What is the difference between blended and paid CAC?

• Blended CAC divides all acquisition costs by all new customers, including those who came through word of mouth or organic search.
• Paid CAC divides paid acquisition costs by the customers that paid channels brought in.

Andreessen Horowitz notes that blended CAC is not wrong, but it does not show whether your paid campaigns are working. A strong organic channel can hide an expensive paid one. Track both.

What is a good CAC?

A good CAC is one that is low compared with what a customer is worth. Industry averages vary so much by business model, deal size and sales cycle that they are of little use. Use these three checks instead.

1. The LTV to CAC ratio

Compare CAC with customer lifetime value (LTV), the profit you expect from a customer over the whole relationship.

• Below 1:1 you lose money on every customer you win.
• Around 1:1 you lose money once the cost of serving the customer is included.
• 3:1 is a widely used rule of thumb for a healthy business.
• Well above 3:1 can mean you are underinvesting in growth.

Base LTV on profit, not revenue. A revenue-based LTV makes it look as if you can afford a higher CAC than you can.

2. CAC payback period

The payback period is the number of months it takes to earn back CAC from a customer's gross profit:

CAC payback (months) = CAC / (monthly revenue per customer x gross margin)

With a CAC of $1,200, $100 in monthly revenue per customer and an 80% gross margin, payback takes 15 months. The shorter the payback, the faster you can reinvest in growth. For subscription businesses, compare payback with how long customers typically stay.

3. The trend

Watch whether CAC rises or falls over time and per channel. Rising CAC with flat lifetime value is an early warning sign.

How can you lower your customer acquisition cost?

• Improve conversion rates. More visitors turning into leads, and more leads into customers, lowers CAC without extra spend. See conversion rate optimization.
• Tighten your targeting. Spend on the segments that close fastest and stay longest. A clear ideal customer profile cuts wasted ad spend and sales time.
• Invest in organic channels. SEO, content and email cost money to build, but they keep producing leads without paying per click.
• Ask for referrals. Happy customers bring in new ones at a low cost. A referral or partner program can turn this into a repeatable channel.
• Shorten the sales cycle. Better qualification, faster follow-up and clear proposals mean fewer sales hours per deal.
• Cut channels that do not pay back. Calculate CAC per channel and move budget from the most expensive channels to the cheapest ones that still bring the right customers.
• Keep customers longer. This does not lower CAC itself, but it raises lifetime value, so the same CAC becomes more profitable. See our guide to managing customer churn.