Customer Acquisition Cost (CAC) is a fundamental financial metric quantifying the average cost to acquire a new customer, calculated by dividing total marketing and sales expenses by the number of new customers acquired during a specific period. Understanding and optimising CAC is essential for sustainable business profitability.
Calculating CAC
The basic CAC formula divides all marketing and sales expenses over a period by the number of new customers acquired in that same period:
CAC = Total Marketing & Sales Expenses / New Customers Acquired
For example, if a company spends £50,000 on marketing and sales and acquires 1000 new customers, the CAC is £50 per customer.
This simplicity masks complexity when allocating expenses across channels and time periods. Understanding which marketing channel drives which customer acquisition is crucial for CAC analysis.
CAC Payback Period
CAC payback period measures how long it takes for revenue from a customer to recoup the acquisition cost. A customer acquired for £50 with £5 average monthly revenue has a 10-month payback period.
Shorter payback periods enable faster reinvestment and growth. Most SaaS businesses target 12-month payback periods or shorter.
CAC Across Channels
Different marketing channels produce vastly different CACs. Organic search and referral typically generate lower CACs than paid advertising. Social media advertising CACs depend heavily on targeting precision and audience relevance.
Channel-specific CAC analysis reveals which marketing investments generate the most efficient customer acquisition, guiding budget allocation decisions.
CAC-to-LTV Ratio
Comparing CAC to Customer Lifetime Value (LTV) reveals business health. A common benchmark is LTV-to-CAC ratio of 3:1, meaning customers generate three times their acquisition cost in lifetime value.
Ratios below 3:1 indicate unsustainable unit economics requiring improvement to pricing, retention, or cost reduction.
Reducing CAC
Improving conversion rates on existing traffic reduces CAC without increasing marketing spend. Even small percentage-point improvements in conversion significantly impact unit economics.
Enhancing organic search visibility through SEO reduces marketing spend requirements whilst improving perceived credibility. Content marketing generates organic traffic at substantially lower CAC.
Referral programmes and word-of-mouth marketing often produce exceptional CACs by leveraging existing customer satisfaction for acquisition.
PixelForce CAC Optimisation
PixelForce has supported numerous marketplace and content platforms in optimising acquisition economics. Our experience with projects like EzLicence demonstrates sophisticated approaches to maximising CAC efficiency through improved user experience and conversion optimisation.
CAC Variability
CAC varies significantly across business models, industries, and market maturity stages. Early-stage apps typically have higher CACs as brand awareness develops and marketing channels are optimised.
Enterprise sales typically involve higher CACs due to longer sales cycles and higher-touch sales processes, but corresponding higher customer values offset this.
CAC Improvements Over Time
Well-optimised businesses see declining CAC as brand awareness increases, marketing efficiency improves, and referral-driven growth accelerates. Increasing CAC signals deteriorating marketing efficiency requiring investigation.
Seasonal Variations
Many businesses experience CAC seasonality with acquisition costs higher during slower seasons and lower during peak seasons when demand is highest.
Future CAC Trends
Performance marketing tools enabling precise attribution and real-time bidding optimisation are reducing CACs for digitally-native businesses. Automated marketing platforms increasingly identify optimal spending allocation across channels.
Privacy changes limiting tracking capabilities are increasing CACs for some advertising channels whilst benefiting platforms excelling at first-party data strategies.