Customer Acquisition Cost (CAC)
Customer Acquisition Cost (CAC) is the average cost a business pays to win one new paying customer. It is calculated by dividing total sales and marketing spend over a period by the number of new customers acquired in that period. CAC is read alongside customer lifetime value to judge whether growth is profitable, and it shows how efficiently a go-to-market engine turns spending into customers.
How Customer Acquisition Cost Works
The basic formula is:
CAC = Total sales and marketing cost in period / New paying customers acquired in period
The hard part is counting costs fully. Andreessen Horowitz (a16z) stresses that CAC should include the full cost of acquiring customers. That covers advertising, sales and marketing salaries and commissions, agencies, tools, content and events, and items that are easy to forget, such as referral fees, credits and discounts used to close deals.
Teams usually look at more than one version:
- Blended CAC divides all acquisition cost by all new customers, including those who arrived for free through word of mouth or search.
- Paid CAC divides spend on paid channels by the customers those channels brought in. a16z notes that blended CAC is not wrong, but it does not show how well paid campaigns work, and many investors like to see both.
- CAC by channel or segment shows where spending is efficient.
Timing matters too. With a long sales cycle, money spent this quarter may produce customers next quarter, so some teams lag the spend period to match.
A related measure, the CAC payback period, shows how many months it takes to earn back the cost:
CAC payback (months) = CAC / (Monthly revenue per new customer x Gross margin)
Why Customer Acquisition Cost Matters
CAC on its own says little. It becomes useful next to customer lifetime value (LTV). SaaS investor David Skok suggests the best SaaS businesses have an LTV to CAC ratio above 3, and recover CAC within about 12 months, with many of the best doing it in 5 to 7 months. A fast payback also protects cash, since the company spends money before the customer pays it back.
Tracking CAC over time also reveals trends. Rising CAC can mean a channel is saturated or competition is bidding up prices. Falling CAC often follows better conversion or more word of mouth. This is a big reason companies adopt product-led growth, which lets the product do some of the selling. Choosing the right go-to-market motion largely sets how high CAC will be.
Customer Acquisition Cost Example
In one quarter, a SaaS company spends $60,000 on marketing and $90,000 on sales, a total of $150,000. It wins 100 new customers, so blended CAC is $1,500.
Of that spend, $50,000 went to paid ads, which brought in 20 customers, so paid CAC is $2,500. The rest came from search, referrals and outbound sales.
New customers pay $200 per month on average at an 80% gross margin, so each one contributes $160 a month. CAC payback = 1,500 / 160, about 9.4 months.
Customer Acquisition Cost vs. Cost per Acquisition (CPA)
Cost per acquisition is an advertising metric. It usually counts only media spend and defines an "acquisition" as any tracked conversion, such as a sign-up, lead or trial. CAC counts the full sales and marketing cost and only paying customers. A campaign can have a low CPA and still produce an expensive CAC if few of those sign-ups go on to pay.