Customer acquisition cost (CAC) is the total you spend on sales and marketing in a period divided by the number of new paying customers you won in that period. Unlike cost per lead, it counts customers, not enquiries, and it should include more than ad spend.
How customer acquisition cost works
Here is an illustrative example for a small B2B software company over one quarter, using figures excluding VAT. VAT-registered businesses reclaim the VAT on these costs, so the net figure is the real cost.
| Cost | Quarter |
|---|---|
| Google and LinkedIn ad spend | £9,000 |
| Freelance content writing | £3,000 |
| Marketing software | £600 |
| Share of salesperson’s salary spent on new business | £7,500 |
| Total | £20,100 |
The company won 30 new customers in the quarter, so CAC is £20,100 ÷ 30 = £670.
Decide too what counts as a new customer. For a subscription business it is a first paid month, not a free trial sign-up. For a shop it is a first order from someone who has never bought before, which means checking email addresses against past orders rather than trusting every platform’s “new customer” label.
You will meet a few variations. Paid CAC uses ad spend and customers from paid channels only. Blended CAC uses all acquisition costs and all new customers, which is harder to flatter. For businesses with long sales cycles, spend in March may win customers in June, so compare spend with the customers it produced, not just the customers who happened to sign in the same month.
Why it matters
CAC answers the question every growth plan rests on: does winning a customer cost less than the customer is worth? On its own it means little. Compared with customer lifetime value, it shows whether growth makes money. The CAC payback period shows how many months of margin it takes to earn the cost back, which matters for cash flow even when the business is profitable on paper.
CAC also rises as you scale. The first £1,000 a month on search ads buys the people most ready to buy; each extra £1,000 reaches people a little less ready. Watching CAC as spend grows tells you when a channel is close to its limit.
Lenders and investors ask for it as well. Anyone assessing a growing business, from a bank to an angel investor, will want to see CAC calculated the same way over several quarters, next to lifetime value and payback.
Common mistakes
- Counting ad spend only. It leaves out salaries, fees and tools, and makes acquisition look cheaper than it is.
- Counting repeat buyers as new customers. Returning customers belong in retention figures.
- One CAC for very different customers. A £50-a-month customer and a £2,000-a-month customer should not share an average.
- Comparing CAC with the first order. If customers stay for years, judge CAC against their lifetime contribution.
How to act on it
Agree in writing which costs count, then calculate CAC monthly or quarterly the same way every time. Split it by channel where tracking allows, and by customer type. Put it next to lifetime value; the LTV and CAC calculator shows the ratio and payback period from your own numbers. If CAC is rising, look first at lead quality and conversion rates before cutting budget. Working out an acquisition budget the business can afford, and the channel split behind it, is part of my digital marketing strategy work.