In short
Customer acquisition cost is the total amount spent on sales and marketing in a period, including salaries, agency fees, software and advertising, divided by the number of new customers acquired in that period. It should be calculated blended (all channels) and separately for each paid channel, because paid CAC is what you control with a budget while blended CAC is what the business actually pays. On its own the number means little; it becomes useful when compared with what a customer is worth over their lifetime and with how many months of revenue it takes to earn back.
The formula
Customer acquisition cost, usually shortened to CAC, is:
CAC = total sales and marketing spend in a period / new customers won in that periodIf a business spent £12,000 on marketing and sales in a quarter and signed 40 new customers, its CAC for the quarter was £300. The calculation is simple enough that the number is often quoted casually, and casually calculated numbers are usually wrong in the same direction: too low, because the spend was under-counted.
What goes in the numerator
Ad spend is the visible cost and the one most small businesses mean when they say CAC. The full cost of acquiring customers is larger:
- Advertising, across every platform.
- People: the salaries and time of anyone doing marketing or sales, including a founder's hours if they are the sales team.
- Agencies, freelancers and contractors doing SEO, content, design, paid media.
- Software: CRM, email, analytics, ad tools, scheduling.
- Content and creative production: articles, video, photography, the website itself, amortised over its useful life.
- Discounts and incentives given to win the first order.
Leaving out people and tools can halve the apparent number. The honest version includes everything whose purpose is winning new customers, and excludes what serves existing ones (support, account management, retention marketing).
Salaries and time of people doing it
Agencies and freelancers
Software
Content and creative
First-order discounts
What goes in the denominator
New customers only. Renewals, upsells and repeat orders from existing customers are not acquisitions. Leads and sign-ups are not customers either; counting them produces a cost per lead, which is a useful number but a different one. Define a customer as someone who has paid, and count first payments.
The timing problem
Spend and its results do not fall in the same period. An article published in January brings enquiries in June; an ad clicked in March converts in April after two more visits. Over a short window this makes CAC jump around and can make a channel look better or worse than it is. Two remedies: use a period long enough to absorb the lag, a quarter at minimum for most services, and be consistent about which period each cost and each customer is assigned to. For long sales cycles, some businesses lag the spend, dividing this quarter's customers by last quarter's spend.
Blended and paid CAC
| Measure | Numerator | Denominator | Tells you |
|---|---|---|---|
| Blended CAC | All sales and marketing spend | All new customers | What the business pays per customer overall |
| Paid CAC | Spend on a paid channel, plus the people running it | Customers attributed to that channel | Whether the channel is worth its budget |
| Organic CAC | Content, SEO, site costs | Customers from search, referral, direct | What the compounding channels cost |
Blended CAC hides the fact that referrals and search customers arrive nearly free while paid customers may be expensive, so a business can be scaling a losing channel while the blended number looks fine. Paid CAC by channel is the number to watch when deciding budgets. Attribution is imperfect, especially for the invisible top of the funnel, so treat channel CAC as approximate and the blended number as the truth.
How the website changes CAC
A website is both a cost in the numerator and a lever on the denominator. Doubling the conversion rate of the pages paid traffic lands on halves paid CAC without touching the ad budget, which is why conversion optimisation is often the cheapest CAC reduction available. Content that earns search traffic pushes organic CAC down over time as the same articles keep producing customers with no marginal spend. Neither shows up if CAC is only calculated on ad spend.
What a good CAC is
There is no universal figure. A £300 CAC is excellent for a £5,000 contract and ruinous for a £20 product. The number only becomes meaningful next to two others:
- Customer lifetime value, the revenue or margin a customer produces over their relationship. A common rule of thumb is that lifetime value should be at least three times CAC, though the ratio depends on margins and growth stage.
- Payback period, the months of gross margin from a customer needed to recover their CAC. Under twelve months is comfortable for most businesses; beyond that, growth consumes cash faster than customers return it, and churn starts to threaten the recovery.
A CAC that is rising quarter on quarter, with the same channels and the same offer, is the early warning that a channel is saturating. That trend is worth more attention than the absolute level.
Keeping it honest
Calculate CAC quarterly, include the people, split it by channel where attribution allows, and write down the definitions so the number means the same thing next year. The purpose is not a figure for a slide but a decision: which channel to fund, which to cut, and whether the site is doing its share of the work. If you would like help working out what your site contributes to acquisition, book a call.
Common questions
How do you calculate customer acquisition cost?
Add up all sales and marketing spend in a period, including salaries, agency fees, software and advertising, and divide by the number of new paying customers won in that period. Exclude spend on serving or retaining existing customers.
What is a good customer acquisition cost?
There is no universal figure. Compare CAC with customer lifetime value (a common rule of thumb is a lifetime value at least three times CAC) and with payback period (ideally under twelve months of gross margin). A CAC that is rising with no change in channels is the warning sign.
What is the difference between CAC and cost per lead?
Cost per lead divides spend by enquiries or sign-ups; CAC divides it by paying customers. Cost per lead is useful for judging campaigns quickly, but only CAC tells you what a customer actually costs, because lead quality varies by channel.
Should CAC include salaries?
Yes. The time of anyone whose job is winning new customers, including a founder doing sales, is an acquisition cost. Excluding it makes CAC look far lower than it is and misleads decisions about which channels to fund.
How does a website reduce CAC?
By converting more of the visitors you already pay for, which lowers paid CAC without more ad spend, and by earning search traffic that produces customers at little marginal cost over time. Both effects are invisible if CAC is calculated on advertising alone.
