Customer Acquisition Cost (CAC) Formula and Examples

Customer Acquisition Cost (CAC) Formula and Examples

Customer Acquisition Cost (CAC) measures the total marketing and sales expenses required to gain one new paying customer.

It is calculated by dividing total acquisition costs — such as ad spend, sales salaries, and marketing software — by the number of customers acquired within a given period.

For growing SaaS and eCommerce companies, CAC serves as a benchmark for profitability and efficiency in customer growth.

Understanding and optimising CAC helps align budgets, improve ROI across acquisition channels, and ensure sustainable scaling.

What is Customer Acquisition Cost?

Your customer acquisition cost represents the average expense incurred to acquire a new customer. It's calculated by dividing all your new acquisition marketing expenditures in a given period by the number of new customers gained in that same time frame.

CAC Formula:

Total Acquisition Marketing Costs / Number of New Customers = CAC

For example, if you spent $20,000 last month on sales and marketing activities that produced 1,000 new customers, your CAC would be $20 per customer acquired.

Understanding your customer acquisition cost enables you to calculate your payback period—the time it takes to recoup your initial investment in acquiring new customers through their transactions. We'll explore the payback period more later on.

First, look at some key reasons why tracking CAC should be a priority.

Why Track Customer Acquisition Cost?

Monitoring your customer acquisition cost delivers several critical insights:

• Gauge Profitability – Knowing your CAC helps determine your customers' profit margin and lifetime value. This indicates whether your business model is financially viable.
• Identify Effective Channels – Breaking down CAC by marketing channel highlights the most cost-efficient acquisition strategies.
• Spot Trends – Tracking changes in CAC over time can reveal positive or negative trends in the efficiency of your customer acquisition efforts.
• Set Targets – Establishing a target CAC per customer segment focuses on marketing spend and helps drive desired outcomes.
• Inform Budgets – The cost of acquiring customers affects the budgets required to meet growth projections.

Understanding CAC enables you to allocate resources more effectively to drive sustainable business growth.

Next, let's examine popular methods for calculating customer acquisition costs.

CAC Calculation Methods

While the basic CAC formula is straightforward, several key factors influence how you should approach quantifying your total acquisition marketing costs and the number of new customers acquired.

Standard CAC calculation methods include:

1. Straightforward Method

This simple approach works best for companies with a limited number of clearly defined acquisition channels.

• Numerator – Sum all external marketing costs for a defined period
• Denominator – Count new customers acquired in the same period

The straightforward method relies on cleanly attributing customers to specific acquisition channels, which becomes complex when multiple touches or online channels are involved.

2. Algorithmic Attribution

Algorithmic modelling aims to tackle the multi-touch attribution challenge by algorithmising acquisition credit across interactions.

• Apportions credit to multiple channels based on predictive influence on conversion
• It is more complex, but it accounts for nuances in the customer journey.
• Relies on robust analytics tracking and modelling

SaaS tools like Baremetrics offer algorithmic CAC reporting.

3. Marginal Cost Method

This concept focuses on quantifying the incremental expense of acquiring the next customer.

• Accounts for fixed vs variable acquisition costs
• Calculates the marginal cost of increasing the customer count by one
• Provides a forward-looking benchmark for optimal spend

The marginal cost method sets a target for what expanding your customer base can cost-effectively support.

Let's examine five key components that contribute to your total customer acquisition costs.

7 Key Components of Total Acquisition Cost

Successfully quantifying CAC requires identifying all sources of customer acquisition spending. Standard acquisition cost components include:

1. Advertising Costs

• Digital ads (Google, Facebook, etc.)
• Print, TV, and radio ads
• Direct mail campaigns
• Any ads specifically driving new customer sign-ups

2. Marketing Agency Fees

• Digital marketing consultancies
• Creative and branding agencies
• PR firms focused on awareness
• Percentage tied to new customer acquisition

3. Sales Team Costs

• Sales representative salaries
• Sales operations staff
• Sales software/tools
• Portion responsible for new leads/customers

4. Promotional Discounts

• Temporary price reductions
• Free gift incentives
• Percentage allocated to customer acquisition

5. Referral Programs

• Referral fees/bonuses
• Cost of promos and software
• Again, this is tied to the new customer tally

6. Content Creation Costs

• Salaries for your content team – writers, designers, the lot. They don't work for free, do they?
• Cash you're shelling out for freelancers because you can't do it all yourself.
• Don't forget the tools and assets, like stock photography or video production. That stuff adds up.

7. Technical and Software Costs

• Your marketing automation platform – it’s part of the machine that gets you customers.
• The CRM software is where you keep all your leads. That's a direct acquisition tool.
• All those analytics and SEO tools you subscribe to. If they help you get customers, their cost goes in the pot.

Isolating these costs gives a 360-degree view of acquisition spending. Now, let's examine best practices for counting newly acquired customers.

Best Practices for Counting New Customers

Using well-defined rules for what constitutes a new customer ensures CAC calculations are consistent and accurate. Here are some essential best practices:

• Set a Clear Timeframe – Standardise a specific window, like 60 or 90 days, without a transaction to count as a new customer.
• Avoid One-Offs – Be wary of one-time shoppers who will skew average costs. Monitor repeat transaction rates.
• Identify True Influence – Watch for false positives from broad promotional campaigns and discard sign-ups not linked to marketing spend.
• Break Out Segments – Calculate CAC separately for customer segments with significantly different acquisition costs.
• Track Channel Source – Tag each new customer with the marketing channel influencer to enable optimisation.

Getting an accurate new customer count requires some upfront work—but pays dividends through trustworthy CAC figures.

Now, let’s explore five critical strategies for optimising customer acquisition costs.

5 Customer Acquisition Cost Optimisation Strategies

Once you have a solid handle on your current CAC, you can apply levers to reduce it. Here are five proven CAC optimisation frameworks:

1. Improve Targeting Precision

• Narrow focus to well-defined buyer personas
• Serve hyper-targeted ads to likely prospects
• Waste fewer dollars on low-potential sign-ups

2. Double Down on Top Performers

• Identify the most efficient acquisition channels
• Shift budget toward high-ROI channels – strategically calls for a reduction in low-ROI areas.

3. Monitor Competition Spend

• Benchmark competitor CAC for perspective
• Watch for changes in rivals’ spending
• Maintain desired market competitiveness

4. Test New Channel Ideas

• Pilot innovative new outreach ideas
• Measure test CAC vs the control group
• Scale winners, kill losers

5. Automate Where Possible

• Use chatbots to engage prospects
• Build signup and onboarding flows
• Lower reliance on expensive humans

6. Implement Conversion Rate Optimisation (CRO)

• Look, getting traffic is just one bit of the puzzle. If your website is a leaky bucket, you're just burning money.
• CRO is about plugging those leaks. A/B test your landing pages, make your checkout dead simple, and speed up your site.
• You turn more of the visitors you already have into customers. It's basically free money.

7. Enhance Customer Retention

• Why go to such great lengths to acquire a new customer only to lose them a month later? The thing is, keeping a customer is way, way cheaper than finding a new one.
• Nail your onboarding, give them brilliant support, and keep them engaged. Stop them from walking out the door.
• Better retention means you don't have to spend as much on acquisition to hit your growth targets. Simple as that.

Now that we’ve covered calculating and optimising CAC, let’s examine how to use it to determine your customer payback period.

Using CAC to Calculate Payback Period

Your customer payback period represents the time it takes to recoup your initial acquisition investment through that new customer’s business.

You can calculate the payback period by determining customer lifetime value (LTV)—the total revenue expected from a typical customer relationship. Then divide LTV by CAC:

Payback Period Formula:

LTV / CAC = Payback Period

For example, if your:

• The average customer lifetime value (LTV) is $400
• You spent $100 to acquire this customer
• Payback Period = $400 LTV / $100 CAC = 4 months

Ideally, you want to acquire customers with a payback period significantly shorter than their anticipated customer lifetime. This generates substantial profit from each customer.

The Importance of the LTV to CAC Ratio

Right, so you've got your CAC number, which is a good start.

But on its own, that number means absolutely nothing.

It's like knowing the price of a car without knowing how far it'll drive.

The real magic happens when you pair it with your Lifetime Value (LTV).

The LTV to CAC ratio is the health check for your business model.

It tells you straight up if you're making money or just spinning your wheels.

• A 1:1 ratio is a disaster. You're spending a tenner to get a customer who only ever gives you a tenner back. After you pay for everything else, you're well and truly in the red. You're not running a business, you're running a charity.
• A 3:1 ratio is where you want to be. This is the sweet spot. For every quid you spend, you get three back over that customer's lifetime. That's a healthy, sustainable business that can actually grow.
• A 5:1 ratio or higher is interesting. Sounds great, right? But it might mean you're being too tight with your marketing spend. You could be leaving growth on the table by not investing more to acquire customers.

Forget everything else for a minute.

If you can get this ratio right, you've got a license to print money.

If it's wrong, you're just pouring water into a bucket with a hole in it.

Next, let’s examine key statistics that highlight healthy CAC benchmarks to aim for.

Key Customer Acquisition Cost Statistics

Understanding industry-average CAC figures provides helpful context for interpreting your numbers. Here are a few insightful benchmarks:

• The average CAC across online software companies is $215 ($200 median).
• The average CAC for the Travel industry is about $7. A pittance, really.
• For Retail E-commerce, you're looking at an average of around $10 per customer.
• Financial Services is a different beast entirely, with an average CAC of about $175. Big money, big spend.
• Top-performing SaaS firms have CAC at around 40-50% of average LTV.
• The average payback period for many online services is 5-8 months.
• The average monthly website visitor-to-customer % conversion rate is 3%.
• The typical conversion rate from visitor to lead is 5%.
• The benchmark lead-to-customer conversion rate is 10-25%.

So, for a SaaS company with a $500 LTV and a 3% visitor-to-customer conversion rate, a reasonable CAC benchmark would be:

• Target visitor-to-lead conversion >= 5%
• Target lead-to-customer conversion >= 15%
• Implies CAC ~$200 = 40% of $500 LTV

Next, examine a few examples that apply the CAC concepts covered.

Customer Acquisition Cost Examples

Consider the following scenarios for how CAC can be calculated and applied:

Online retailer example

• Spent $400k last year on marketing
• Gained 200k first-time customers
• CAC = $400k / 200k = $2 per new customer

SaaS company example

• 130k total new customers last year
• $15 million total sales and marketing budget
• 25% of the budget is tied to new customer acquisition
• CAC = $3.75 million (25% * $15 million) / 130k customers = $29 per customer

Gym membership example

• Ran radio ads costing $5k over 2 months
• Signed up 100 new members during the campaign
• No other acquisition channels
• CAC = $5k ad spend / 100 new members = $50 cost per new member

As you can see, CAC differs significantly across industries, business models, and marketing strategies. However, the same principles apply in understanding payback periods, break-even points, and acquisition ROI.

Key Takeaways and Action Steps

Tracking and optimising customer acquisition costs is mission-critical, but doing it right involves some heavy lifting. Here are the key takeaways:

CAC Fundamentals

• Calculates avg. spend to acquire each new customer
• Quantifies acquisition marketing ROI
• Helps strategically allocate spend

CAC Calculation

• Total costs divided by new customers
• Requires identifying all cost components
• It needs consistent new customer counting

Optimisation Levers

• Improve targeting precision
• Double down on efficient channels
• Automate where possible
• And more!

Next Steps

• Gather inputs required for the initial CAC baseline
• Set processes for ongoing data collection
• Build models allocating multi-touch credit
• Utilise benchmarks and LTV context for insights
• Identify top-priority optimisation hypotheses

With these foundations in place regarding your customer acquisition cost, you’ll be well-positioned to accelerate profitable growth.

Frequently Asked Questions

Here are answers to some common questions about calculating and applying customer acquisition costs: