Customer acquisition cost (CAC) is everything you spend on marketing and sales in a set period, divided by the number of new paying customers in that period. Count ads alone and the figure comes out too low, and you may scale a campaign that loses money on each customer while it looks profitable.
Below you'll find the formula, a table to copy and fill in with your own figures, a way to work out the highest cost your profit can carry, and fixes ordered by where the fault sits.
The customer acquisition cost formula and what goes in it
CAC = total marketing and sales costs ÷ new customers who paid
Most errors are in the top half. Add up everything you paid to bring the customer in, beyond the ad platform's invoice:
- Spend on ad platforms.
- The salary of whoever runs marketing, or agency fees.
- Content production: photography, editing and design.
- Tool subscriptions, such as a CRM (customer relationship management system) and scheduling tools.
- Sales commissions and the sales team's salaries.
The bottom half has one condition: a new customer who actually paid. Leave out requests that never became sales and existing customers who came back, since counting them lowers the figure without anyone new arriving.
A calculation table with a hypothetical example
Copy this table and enter your last complete month in the right-hand column. The figures are hypothetical, in generic currency units, and don't describe any real company.
| Item | Hypothetical figure | Your figure |
|---|---|---|
| Ad spend | 40,000 | |
| Campaign management | 12,000 | |
| Content production | 6,000 | |
| Tools and subscriptions | 2,000 | |
| Sales commissions | 5,000 | |
| Total | 65,000 | |
| New customers who paid | 100 | |
| Customer acquisition cost | 650 |
Counting ads alone, this company would say a customer costs 400. The real cost is more than 60% higher, a gap wide enough to turn a profitable-looking expansion into a loss.
Calculate the overall figure and the channel figure
You need two numbers because each answers a different question:
- Overall cost: all marketing and sales costs ÷ all new customers from any source. It shows the health of marketing as a whole.
- Paid channel cost: one channel's costs ÷ the new customers it brought. It helps you move budget between channels.
If half your customers come by referral, the overall figure can look fine while the ads lose money. Check both monthly. The second depends on knowing each customer's source, which we cover in how to measure conversions after the privacy changes.
With a long sales cycle, don't divide by the same month's customers
In real estate or business-to-business services, a customer may buy two months after first contact. Divide October's spend by October's customers and you credit that budget with people August's spend brought in.
Calculate by cohort instead. Take the requests that arrived in one month, wait your usual selling period, count who bought, and divide that month's costs by that count. Until the period ends, treat the figure as provisional.
How do you know the number is good? Compare it with the profit a customer leaves
A good CAC is one below the profit a customer leaves with you. Apply these steps to our hypothetical example:
- Profit on the first sale: an average sale of 1,500 at a 40% margin before marketing leaves 600. Against a cost of 650, you lose 50 on the first sale.
- Lifetime value (LTV): if the average customer buys 3 times, total profit is 1,800, about 2.8 times the cost.
- Payback period: if a customer leaves 130 a month, you recover 650 in 5 months.
You may hear that lifetime value should reach 3 times acquisition cost. The figure usually traces back to David Skok's writing on subscription software, which says the best of these companies exceed 3 times, that profitability looks weak when recovery takes more than 12 months, and that these are only guidelines that can be broken, in his SaaS Metrics 2.0 article. Use it as a comparison if your business resembles a subscription, and work out your own limit if you sell something bought once.
The last question is about cash. Can your company fund 5 months per new customer before the money returns? Figures can hold up on paper while the business stalls because cash ran out first.
Five ways to lower the cost, by where the fault sits
Start from the row that describes you, since each fault has a different fix:
| What you see | The fix | How to measure it |
|---|---|---|
| Many visits, few requests | Improve the page and the offer before adding budget | Share of visitors who leave a request |
| Many requests, few sales | Repair replies, follow-up and screening | Share of requests that end in a sale |
| One channel costs far more than the rest | Move part of its budget to a cheaper one, judging by customers and ignoring clicks | Cost per customer by channel |
| Cold and warm audiences share one campaign | Separate them so you can see each one's cost | Cost per customer by audience |
| The cost holds steady and won't fall | Raise customer value with a repeat offer or a larger bundle | Profit per customer and payback period |
The page is the clearest of these on paper. In our hypothetical example, doubling the conversion rate at the same spend gives 200 customers. If commissions rise to 10,000, the total is 70,000 and the cost is 350 instead of 650. If the trouble starts after the request arrives, go to why you get plenty of leads and few sales.
Mistakes that make the figure misleading
- Judging from one month: seasons and offers move the number. Compare at least three months in a row.
- Merging Egypt and Saudi Arabia: ad costs and prices differ, so calculate each market on its own.
- Cutting cost by attracting weaker customers: a cheap customer who never returns can cost more than one who cost you double.
- Leaving out your own salary when you sell yourself: your time is a cost, and it appears the day you hire a replacement.
Common questions
How is it different from cost per lead? Cost per lead is what you pay for someone who left their details and may never buy. CAC counts only those who paid, so it's usually the higher number.
How do I calculate it with few customers? Estimate backwards: the highest acceptable cost per customer multiplied by your request-to-sale rate gives the highest acceptable cost per request. Correct it after your first group of sales. Our article on where to start with digital marketing places this calculation within the order of channels.
Next step
Collect last month's invoices this week, fill in the table, and compare the result with the profit on the first sale. If you'd like someone to build this calculation for each channel and review it monthly, take a look at PlanKit's digital marketing and campaigns service.