Complete Definition
Customer Acquisition Cost (CAC) is one of the most critical metrics for any business, representing the total cost required to acquire a new paying customer. This includes all marketing expenses, sales team salaries, advertising costs, software tools, and any other resources dedicated to converting prospects into customers.
Understanding your CAC is essential because it directly impacts profitability. If you spend more to acquire customers than they're worth, your business model is unsustainable. CAC should always be analyzed alongside Customer Lifetime Value (LTV) to ensure healthy unit economics.
How to Calculate CAC
CAC = Total Sales & Marketing Costs / Number of New Customers Acquired
Components typically included
- Advertising spend (paid ads, social media, content promotion) - Marketing team salaries and overhead - Sales team compensation (base + commission) - Marketing software and tools - Content creation costs - Event and sponsorship expenses
Why CAC Matters for Startups
Early-stage startups often have high CAC as they experiment with channels and messaging. As you scale and optimize, CAC should decrease. Investors closely scrutinize CAC because it indicates how efficiently you can grow.