Why it matters
CAC is the price of growth. Whatever you spend on sales and marketing, CAC says how many paying customers it bought, and therefore whether the spend is working. A rising CAC with flat pricing is an early warning that a channel is saturating.
It matters most beside what a customer is worth. A CAC is only high or low relative to lifetime value and to the margin a customer pays back each month, which is why it feeds both the payback period and the LTV to CAC ratio.
The formula
Add up everything spent on sales and marketing in a period, including salaries, tools, advertising and commissions. Divide that by the new paying customers won over the same period. If you run free trials, you can reach the same figure from the trial side: the cost of one trial divided by the share of trials that become paying customers.
CAC = total acquisition spend / customers won
CAC = cost per trial / trial-to-paid rateA worked example
A business spends the following in one quarter. These numbers are made up for illustration.
| Example numbers | Value |
|---|---|
| Sales spend | $22,000 |
| Marketing spend | $13,000 |
| Total spend | $35,000 |
| New paying customers | 50 |
| Trials started | 250 |
| Customer acquisition cost | $700 |
| Cost per trial | $140 |
| Trial-to-paid rate | 20% |
Spending $35,000 to win 50 paying customers gives a CAC of $700. From the trial side, each trial cost $140, and only 20% of trials paid, so the cost per paying customer is $140 divided by 0.20, which is the same $700. Improving the trial-to-paid rate lowers CAC without cutting spend.
- Sales: $22,000
- Marketing: $13,000
How to improve it
CAC falls when the same spend wins more customers, or when you win the same customers for less.
- Raise the trial-to-paid rate, since every trial that converts lowers the cost per paying customer.
- Shift spend toward the channels with the lowest CAC, and measure channels separately rather than as one blended figure.
- Shorten the sales cycle. Time spent on a prospect is a cost, and a quicker decision lowers it.
- Improve referral and word of mouth, which add customers without a matching rise in spend.
Common mistakes
- Leaving out salaries and tools and counting only advertising. The figure is then far lower than the real cost of a customer.
- Counting new sign-ups and trials as customers. CAC divides by new paying customers.
- Matching one month's spend to the same month's customers when your sales cycle is long. Customers won this month were paid for earlier.
- Blending paid and organic customers, which hides that the paid channels cost far more per head.
- Comparing CAC with revenue instead of with gross margin. A customer must repay acquisition cost from margin, not from revenue.
Calculate it and read next
Work it out with your own figures in the customer lifetime value calculator. Then read about CAC payback period, LTV to CAC ratio and Customer lifetime value.
- CAC payback period: the months of margin needed to repay CAC.
- LTV to CAC ratio: what a customer is worth against what they cost.
- Customer lifetime value: the value that acquisition spend buys.
Frequently asked questions
What spend counts toward CAC?
Everything it takes to win customers: advertising, content, tools, sales and marketing salaries, commissions and agency fees. Leave out the cost of serving customers after they sign.
How do I handle a long sales cycle?
Match spend to the customers it won, not to the same calendar month. A common method is to lag spend by the length of your average sales cycle.
Is blended CAC or channel CAC better?
Both. Blended CAC shows overall efficiency, and channel CAC shows where to spend the next dollar. Blended figures can hide a channel that costs far more than the rest.
How does a free trial affect CAC?
Each trial has a cost, and only some trials become customers. Divide the cost per trial by the trial-to-paid rate to see the cost per paying customer.