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Customer Acquisition Cost (CAC)


What is Customer Acquisition Cost?

Customer Acquisition Cost (CAC) measures the total cost of acquiring a new customer, combining all sales and marketing expenses.

How is Customer Acquisition Cost (CAC) used?

Companies track CAC to assess the effectiveness of marketing strategies, budget allocation, and sales performance. Often a key topic during fundraising discussions, it helps startups understand the investment required to expand their customer base. When compared to Lifetime Value (LTV), CAC can help gauge unit economics and profitability on a per-customer basis.

How to calculate Customer Acquisition Cost (CAC)

CAC = Sales and Marketing Expenses / Number of New Customers Acquired
Fully Loaded CAC = All Costs Associated with Customer Acquisition / Number of New Customers Acquired
Paid CAC = Sales and Marketing Expenses / Number of New Customers Acquired via Paid Channels

To calculate CAC, divide your total sales and marketing expenses by the number of new customers acquired during the same period. It's important to include all associated costs in your calculations, such as advertising, salaries of sales staff, and the cost of marketing tools, to get an accurate figure. Note that Fully Loaded CAC considers overheads, cost of legal services, and discounts. Also, Paid CAC excludes salaries and overheads and only accounts for new customers acquired through paid channels.

Best Practices

To reduce CAC, leverage organic channels and boost content marketing, which can have a longer-lasting impact on inbound lead generation than traditional ads. Iterate and refine on your ICP to avoid spending resource on low-conversion segments and demographics. Also, implement referral programs and build virality into your product. Maintaining balance with LTV is important to ensure sustainable growth and avoid underinvestment in acquisition.

Common Misconceptions

A lower CAC is not necessarily positive; it could signal underinvestment in growth opportunities. Conversely, a high CAC isn't necessarily unsustainable if offset by high LTV. It should be considered alongside your revenue metrics and growth phase.

"Solid unit economics has a cascading effect across your business: a higher LTV:CAC ratio means for every dollar of sales and marketing investment, your company has higher margins and so more profit to reinvest back into its business, which means that you can build better products and, hopefully, capture more market demand. Companies are ultimately valued on their future cash flow generation, so the higher your margins, the higher your valuation."

Jamie Sullivan
Partner, a16z



What are the main drivers of Customer Acquisition Cost (CAC)?
  • Marketing spend
  • Sales spend
  • Overheads
How should I break down Customer Acquisition Cost (CAC)?
  • Industry vertical
  • Geography
  • Company size
  • Acquisition channel
  • Product

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