Customer Acquisition Cost: How to Calculate CAC and Bring It Down

Customer acquisition cost, or CAC, is the average amount you spend on sales and marketing to win one new customer. You calculate it by dividing your total sales and marketing costs for a period by the number of new customers you gained in that same period.

It’s one of the first numbers I ask a founder for, because it connects marketing to the commercial health of the business. Once you know your CAC, you can see how much you can afford to spend, which channels deserve more budget and how quickly your growth pays for itself.

The customer acquisition cost formula

CAC = total sales and marketing costs ÷ new customers acquired

For an accurate number, count everything it takes to win customers in that period:

• Advertising spend

• Agency, freelancer and contractor fees

• Sales and marketing salaries and commissions

• Marketing and sales software

• Content and creative production

• Events and sponsorships

A worked example

Here’s a made-up subscription business in a single month, with all figures for illustration only. It wins 70 new customers.

Dividing $35,000 by 70 customers gives a CAC of $500. If the business counted ad spend alone, it would see $257, which is why including every cost gives you a much more useful picture.

Paid, blended and fully loaded CAC

You’ll see three versions of this number, and each one answers a different question. Paid CAC looks at paid channels and helps you compare campaigns. Blended CAC averages your costs across paid and organic customers, which gives you a quick read on the whole business. Fully loaded CAC includes salaries, overheads and technology, so it’s the version to use for financial planning. The example above is fully loaded.

What a good CAC looks like

A good CAC depends on what each customer is worth to you, so two measures help put it in context. The first is the ratio of customer lifetime value to CAC, written as LTV:CAC. The second is your payback period, which is the time it takes to earn your CAC back in gross profit.

Say each customer in our example pays $60 a month at a 70% gross margin, which leaves $42 a month. A CAC of $500 pays back in about 12 months. If customers stay for 30 months on average, each one is worth $1,260 in gross profit, giving an LTV:CAC of about 2.5:1.

A ratio of 3:1 is commonly cited as a minimum for sustainable growth, particularly in SaaS, and 12 to 18 months is generally seen as an acceptable payback for high-growth SaaS. The right targets vary by industry, business model and stage of growth, so treat these as a starting point. Your own trend over time will tell you the most.

How to reduce your customer acquisition cost

Sharpen your audience and positioning

When your message speaks clearly to the right people, more of the people you reach will buy. A clear positioning statement is often the most cost-effective place to begin.

Lift conversion on the pages you already pay for

Every improvement to your landing pages, forms and sales follow-up turns more of your existing traffic into customers, with no extra media spend.

Back your best channels

Calculate CAC by channel where you can, then move budget towards the ones bringing in customers who stay. Channels that look expensive at first can turn out to be great value once you factor in retention.

Keep investing in brand

Research from the Ehrenberg-Bass Institute suggests only around 5% of B2B buyers are in the market at any one time. Brand activity keeps you front of mind with everyone else, so more people already know you when they’re ready to buy, and your performance activity gets easier and cheaper to run as a result.

Grow the value of the customers you have

Retention and lifecycle marketing lift lifetime value, which improves your ratio even if CAC stays the same. Happy customers also bring referrals, some of the most affordable customers you’ll ever win.

Make your marketing systems cheaper to run

Software and automation costs count towards CAC too. For one SaaS client, I halved their automation costs and set them up on platforms that let anyone work inside their digital marketing.

Common questions

What’s the difference between CAC and cost per acquisition?

Cost per acquisition, or CPA, can refer to any action you’re paying for, such as a lead or a sign-up. CAC refers to a new paying customer.

Should salaries be included in CAC?

Yes, for your fully loaded number. Include the share of each person’s time spent on winning new customers.

How do I calculate CAC with a long sales cycle?

Match your costs to the period that produced the customers. If deals usually take three months to close, compare this month’s new customers with the spend from three months ago.

How often should I calculate CAC?

Monthly is a good rhythm for most businesses, and a rolling three-month average smooths out the bumps.

Your next step

If you’d like help working out your CAC and where the biggest savings sit, a growth audit starts at $995 + GST. You can also book a free 30-minute call and we’ll look at your numbers together.