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Amol Ghemud Published: February 7, 2023
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Customer acquisition cost (CAC) is a metric used to describe how much money companies spend acquiring new clients. In addition to calculating the resources needed to find and onboard new consumers, CAC is an important business metric for gauging your business’s overall health and profitability.
Thus, this is a must-read if you don’t have the answer to the question, ‘how to calculate CAC?’.
Understanding CAC
Customer acquisition cost is the entire cost of the resources and labour that a corporation commits to acquiring new paying customers. The CAC compares the amount of money businesses spend over a specified period on acquiring new customers to the total number of consumers they acquire.
The ROI and overall effectiveness of your client acquisition strategy may be calculated using the CAC. Once companies understand how to expand their client base while keeping their CAC low, they become profitable and scaleable.
How to calculate customer acquisition cost
There are several answers on how to calculate customer acquisition cost, so you need to know which method works best for your business.
The standard customer acquisition cost formula
CAC = Marketing and sales expenses / Number of new customers
The majority of businesses use this as their typical client acquisition cost formula. Divide marketing and sales costs expended during a specific time frame (for example, a month, a quarter, or a year) by the total number of new customers the company acquired during that time frame to get CAC.
The fully loaded CAC formula
The fully loaded CAC formula accounts for all expenses related to client acquisition for your business. Fully loaded costs consist of, among other things, the following:
Overhead expenses for sales and marketing personnel, such as desk space or office rent
The legal costs for drafting contracts for the sales and marketing teams
Exclusive deals and discounts for new clients
For marketers, this complete method of calculating CAC may be overkill, but the fully loaded CAC calculation shows how much your companies may grow. Because of this, it is effective for innovators and investors looking for funding.
Fully loaded CAC = All costs associated with customer acquisition / Number of new customers
Factors that go into the calculation-
The two primary spending categories—marketing and sales—are taken into account by the general CAC calculation. The following information is often used to calculate CAC:
Ad spending:
Ad spending is the amount of money you devote to ads. Advertising is a terrific strategy for certain businesses to draw in new clients. Your target audience must connect with your campaigns for them to be effective. You can determine the worth of a marketing campaign if you’re unsure whether you’re getting a decent return on investment by dividing the income generated by advertising by the campaign’s cost.
Salaries for sales and marketing employees:
The expenses related to hiring sales and marketing specialists.
Creative and content services:
For design, content creation, copywriting, and editing, a creative agency or an internal creative team may be used.
Tech stack for sales and marketing:
The price of purchasing and maintaining the technology that your sales and marketing staff use to bring in new clients. These consist of CRMs and various tools for website management, email marketing, marketing automation, and other purposes.
Production costs:
It is the sum of money used to produce material physically. For instance, businesses must hire a studio and invest in video and audio gear to produce a film that draws in new clients.
Product cost:
These are the expenses incurred for product care and improvement, such as staff and technological costs. For example, a SaaS business could need to upgrade its software to enhance the client experience.
LTV/CAC ratio can be used to assess business profitability.
The CAC stands for the costs businesses incur when acquiring new clients. You should contrast CAC with customer lifetime value (CLV), sometimes known as lifetime value, to determine whether the investment is worthwhile (LTV).
The LTV equation
LTV calculates the revenue each client brings in for the duration of their association with your business. Use the following formula to determine LTV:
LTV = Average value of sale * Number of transactions * Retention time period
Determine LTV to CAC ratio.
It’s time to enter the measured values of LTV and CAC into the LTV to CAC ratio. The LTV/CAC ratio compares the lifetime income generated by each customer to the cost of acquiring that client. The ratio shows the return on investment for each dollar invested in obtaining a new consumer.
A healthy LTV to CAC ratio is roughly 3:1 or 3.0x, meaning that your business keeps a 3x ROI for every dollar it spends acquiring a client. Anything below 3:1 is a sign that your business is either spending too much money on short-term client acquisition or long-term customer retention. You should think about raising your sales and marketing budget and ramping up your growth initiatives if the ratio is greater than 5:1 or at least 5.0x ROI.
Conclusion
Only when you are aware of the costs related to acquiring new clients can you estimate the long-term profitability of your firm and make wise business decisions.
Find your company’s client acquisition expenses immediately to understand how you can better spend your resources.
FAQs
What is the customer acquisition cost formula?
You may use the following formula to determine client acquisition cost: Customer Acquisition Cost is calculated by dividing the cost of sales and marketing by the number of new customers acquired.
CAC = Marketing and sales expenses / Number of new customers
2. How do you calculate CAC example?
We can take the example of Company A-
Company Ainvested ₹5,000 in marketing and sales efforts over a month and added 30 new clients to its clientele. Here, CAC is ₹5000/30 or ₹166 per client. This straightforward calculation reveals that Company A spends ₹166 on average to acquire a new client.
3. How do you calculate LTV and CAC?
The standard calculation for customer acquisition costs
CAC = Marketing and sales expenses / Number of new customers
LTV calculates the revenue each client brings in for the duration of their association with your business.
LTV = Average value of sale * Number of transactions * Retention time period
4. How to calculate acquisition cost?
The CAC is calculated by dividing the overall cost of acquiring consumers by the total number of customers gained within a specific period.
Watch: Mastering CAC Calculation with the Right Formula
Understanding your customer acquisition cost (CAC) provides a direct measure of your marketing and sales engine's efficiency, which is fundamental to scaling your business profitably. It moves beyond simple expense tracking to offer a clear indicator of whether your growth model is sustainable or reliant on inefficient spending. A consistently low and predictable CAC demonstrates a robust and repeatable customer acquisition strategy, a key factor investors evaluate when assessing long-term viability and potential for expansion.
To effectively gauge this, you must look beyond surface-level numbers. A strategic approach involves regularly calculating CAC to understand trends and the impact of different initiatives. Key considerations include:
Marketing and Sales Expenses: This core component includes everything from ad spend to salaries.
Number of New Customers: The denominator that determines the cost per acquisition.
Time Frame Specificity: Calculating CAC for specific periods (e.g., quarterly) helps link costs to results.
By connecting these expenses to the actual customers acquired, you create a powerful narrative about your company's operational effectiveness, which is essential for securing funding. A deeper analysis using the LTV/CAC ratio can further illuminate your company's overall profitability.
The general customer acquisition cost (CAC) calculation aggregates all direct expenses required to attract and convert a new customer. These costs are not limited to ad spend but form a comprehensive picture of your investment in growth. Accurately accounting for these components is vital for creating a realistic financial plan and allocating resources effectively, ensuring that every dollar spent on acquisition is measured and justified.
This calculation provides clarity on where your budget is going and how it contributes to your customer base. A detailed breakdown prevents underestimation of acquisition costs and supports smarter spending decisions. The primary categories of expenses you should include are:
Ad Spending: The direct cost of paid media campaigns across all channels.
Salaries: Compensation for your marketing and sales professionals.
Creative and Content Services: Costs for design, copywriting, and other content production.
Tech Stack: The price of software like CRMs, marketing automation tools, and analytics platforms.
Monitoring these individual costs helps you understand which levers have the biggest impact on your overall CAC. Discover how the fully loaded formula offers an even more granular view.
The standard customer acquisition cost (CAC) formula focuses on direct marketing and sales expenses, offering a clear, high-level view of campaign efficiency. In contrast, the fully loaded CAC provides a far more comprehensive and transparent picture by including all associated overhead and indirect costs. For founders seeking investment, presenting a fully loaded CAC demonstrates a deep understanding of the business's true financial mechanics and operational scalability.
While the standard formula is useful for internal marketing analysis, the fully loaded method is often preferred by investors because it reflects the total cost to the business for each new customer. Deciding which to use depends on your audience and goal:
Standard CAC: Best for internal teams to measure campaign-specific ROI. It is simpler and focuses purely on marketing and sales team costs.
Fully Loaded CAC: Ideal for investors and executive leadership. It includes overhead (rent for sales staff), legal fees, and special discounts, showing you have accounted for all potential growth costs.
Presenting the fully loaded figure shows financial maturity and builds trust, suggesting your growth projections are grounded in reality. Understanding both provides a complete view of your business's acquisition economics.
An ad spend ROI calculation reveals the direct revenue generated from a specific campaign, which is valuable for tactical adjustments. However, the comprehensive customer acquisition cost (CAC) provides a more strategic, holistic view by incorporating all related expenses, including salaries and technology costs. Relying only on ad spend ROI can create a misleading picture of profitability, as it ignores the significant operational costs required to acquire customers.
Comparing these two metrics allows for both short-term optimization and long-term strategic planning. A truly effective growth strategy balances immediate returns with sustainable acquisition costs. To do this, you should consider the distinct roles of each metric:
Ad Spend ROI: Use this to quickly assess the performance of individual ads or campaigns. It answers the question, “Did this specific advertisement generate more revenue than it cost?”
CAC: Use this to evaluate the overall health and efficiency of your entire acquisition engine. It answers the question, “Is our process for winning new customers profitable and scalable?”
Ultimately, a low CAC is a stronger indicator of a healthy business model than a high ROI on a single campaign. To assess true profitability, you should also analyze the LTV/CAC ratio.
For a SaaS business, the product itself is a critical tool for acquisition and retention, making software upgrade costs a relevant expense. Including these product costs in a broader CAC calculation reflects the reality that a superior user experience is essential for attracting new clients. This holistic approach prevents a narrow focus on just marketing and sales, acknowledging that product investment directly supports customer growth and satisfaction.
This method aligns your financial metrics with your operational strategy, ensuring that all growth-related investments are accounted for. Viewing product development as part of the acquisition journey provides a more accurate picture of your business's true cost structure. This comprehensive view includes:
Staff and Tech Costs: The expenses related to developers and tools needed for product improvement.
Enhanced Client Experience: The direct outcome of the investment, which can lower churn and improve conversion rates.
Market Competitiveness: Staying current with product features is necessary to win customers from competitors.
By accounting for these expenses, you get a truer sense of what it takes to acquire and keep a customer in a competitive market. This deeper understanding is key to building a genuinely scalable business model.
Consistently tracking ad spending and sales salaries as part of your customer acquisition cost (CAC) calculation transforms abstract expenses into concrete performance indicators. This data provides irrefutable evidence of how your marketing budget translates into new customers, moving conversations from spending to investing. When you can show that a certain level of expenditure yields a predictable number of clients at a profitable cost, you can confidently justify future budget requests.
This data-driven approach removes guesswork from strategic planning and demonstrates accountability. By linking specific costs to acquisition results, you can pinpoint what is working and what is not. For example, by monitoring these inputs you can:
Demonstrate that a 15% increase in ad spend led to a 20% increase in new customers.
Show that hiring a new sales specialist resulted in a lower overall CAC due to higher efficiency.
Justify investment in a new CRM by showing how it improves team productivity and acquisition rates.
This level of detail is essential for building a strong business case for growth initiatives and optimizing your strategy over time. Learn more about how the LTV/CAC ratio adds another layer to this analysis.
Implementing the standard customer acquisition cost (CAC) formula is a straightforward process that provides immediate insight into your business's efficiency. By systematically gathering and analyzing your expenses, you can establish a crucial baseline for measuring growth and profitability. The key is to be consistent with your data collection to ensure the metric is reliable over time.
This process empowers you to make informed decisions about your marketing and sales efforts. Follow this simple, three-step plan to get started with your calculation:
Define Your Time Period: First, choose a specific timeframe to analyze, such as a month or a quarter. This ensures you are comparing apples to apples.
Sum Your Acquisition Costs: Next, add up all marketing and sales expenses from that period. This should include ad spend, salaries of relevant staff, and costs for your tech tools.
Calculate the Final Number: Finally, count the total number of new customers acquired during that same period and divide your total costs by this number.
The resulting figure is your CAC. A lower CAC indicates greater efficiency, and tracking it over time will show how your strategic changes are impacting performance. Dive deeper to see how this metric compares to customer lifetime value.
For an e-commerce marketing manager, calculating customer acquisition cost (CAC) quarterly provides a strategic rhythm for budget optimization and performance review. This regular cadence is frequent enough to catch trends and adapt to market changes but broad enough to smooth out short-term anomalies. This disciplined approach enables you to systematically improve return on investment by reallocating funds from underperforming channels to high-performers.
To implement this effectively, you must establish a clear process for data collection and analysis each quarter. A consistent monitoring system is the foundation for agile budget management. Your quarterly review should involve these steps:
Aggregate All Costs: Sum up all marketing and sales expenses for the quarter, including ad spend, agency fees, content creation, and salaries.
Attribute New Customers: Tally the total number of new paying customers acquired within that same quarter.
Calculate and Compare: Divide total costs by new customers to get your quarterly CAC. Compare this figure to previous quarters to identify trends.
If your CAC is rising, it signals a need to investigate campaign effectiveness or channel costs. This regular analysis ensures your advertising budget is always working its hardest for your brand.
With rising digital ad costs, the focus of marketing is shifting from pure acquisition to profitable, long-term relationships. The LTV/CAC ratio, which compares the lifetime value of a customer to the cost of acquiring them, is becoming the central metric for sustainable growth. A healthy ratio indicates that you are acquiring customers who generate significantly more value than they cost, which is essential for long-term profitability.
This trend means that future marketing strategies must be equally focused on retention as they are on acquisition. As CAC increases, the only way to maintain a healthy LTV/CAC ratio is to increase LTV. Businesses should adjust by:
Investing in Customer Experience: Enhancing the post-purchase journey to encourage loyalty and repeat business.
Developing Loyalty Programs: Creating incentives that reward long-term customers.
Improving Onboarding: For a service like a SaaS business, a strong onboarding process can dramatically reduce churn and increase lifetime value.
By focusing on retaining and maximizing the value of existing customers, companies can build a more resilient business model that is less vulnerable to fluctuating acquisition costs.
The most common and costly mistake companies make when calculating customer acquisition cost (CAC) is focusing exclusively on direct ad spend while ignoring significant indirect costs. Omitting expenses like the salaries of the marketing and sales teams, software costs, or creative agency fees leads to a deceptively low CAC. This incomplete picture can cause a business to believe its acquisition strategy is profitable when, in reality, it may be losing money on every new customer.
Adopting a fully loaded CAC calculation is the solution to this critical blind spot. This method provides a true, all-encompassing view of acquisition expenses, preventing inaccurate assessments of profitability. By taking this more rigorous approach, you can:
Gain True Financial Clarity: Understand the complete investment required to win a new customer.
Make Smarter Decisions: Allocate resources based on a realistic understanding of costs and returns.
Build Investor Confidence: Demonstrate financial diligence and a sophisticated grasp of your business model.
By accounting for all costs, you ensure your growth is not just happening, but that it is also profitable and sustainable. This comprehensive view is explored further in the full article.
A high customer acquisition cost (CAC) can quickly erode profitability, but simply knowing the number is not enough. A rigorous, component-by-component analysis of the CAC formula is the key to diagnosing the root cause of the inefficiency. By breaking down your total acquisition cost into its constituent parts, such as ad spend, salaries, and tech stack, you can pinpoint exactly where your money is being spent ineffectively.
This granular analysis moves you from awareness to action, enabling targeted interventions rather than broad, speculative changes. A systematic review of each expense category can reveal significant opportunities for cost savings. For example, you might discover:
Inefficient Ad Campaigns: One marketing channel may have a disproportionately high cost-per-acquisition.
Bloated Tech Stack: You may be paying for expensive software that your teams are not fully using.
Sales Team Productivity: The ratio of sales salaries to new customers acquired may be too high, indicating a need for better training or tools.
By addressing these specific issues, you can implement targeted corrective actions to lower your CAC and improve overall business health. Learn more about optimizing each of these components in our complete guide.
Understanding both standard and fully loaded customer acquisition cost (CAC) provides a complete, multi-layered view of your company's financial health. The standard CAC is perfect for marketing teams to gauge campaign effectiveness, while the fully loaded CAC gives executives and investors a true picture of profitability. Using them together creates a powerful bridge between tactical execution and high-level strategic planning, ensuring everyone is aligned.
This dual approach allows for both agility and accuracy in your financial assessments. Each calculation serves a different but complementary purpose in managing business growth.
Standard CAC for Marketers: This focuses on direct marketing and sales expenses. It helps teams quickly assess the performance of specific channels or campaigns and make rapid tactical adjustments.
Fully Loaded CAC for Leadership: This includes all overhead, salaries, and other indirect costs. It provides a holistic view needed for long-term financial modeling, fundraising, and determining overall business scalability.
By tracking both, a marketing manager can optimize ad spend while the CEO can confidently report on the company’s true profitability. Explore the full article to master both of these essential calculations.
Amol has helped catalyse business growth with his strategic & data-driven methodologies. With a decade of experience in the field of marketing, he has donned multiple hats, from channel optimization, data analytics and creative brand positioning to growth engineering and sales.
Growth Strategy and Planning
