Customer Acquisition Cost (CAC)
Definition
Customer Acquisition Cost (CAC) is the total cost of acquiring a new customer, including marketing, sales, and advertising expenses divided by the number of new customers gained.
Explanation
CAC is a fundamental business metric that helps companies evaluate the efficiency of their sales and marketing efforts. It includes all costs associated with converting a prospect into a customer, such as advertising spend, sales team salaries, marketing software, and promotional materials.
A healthy business typically has a CAC that is recovered within 12 months through customer gross margin. The ratio of Customer Lifetime Value (LTV) to CAC is a key indicator of business sustainability, with a ratio of 3:1 or higher considered strong.
Example
A company spends $50,000 on sales and marketing in a month and acquires 200 new customers, resulting in a CAC of $250 per customer.