What Is Customer Acquisition Cost?

One would think that bringing new employees onboard would automatically mean making more money, but it’s significantly more complicated than that. Of course, it depends on the industry and the specific business in question, but something that needs to be seriously considered in customer acquisition cost (CAC).

And despite sounding like one of those metrics that only finance people care about, CAC can tell you whether your startup is building a sustainable business or actually losing a whole lot of money without really even realising it.

What Is Customer Acquisition Cost?

Customer acquisition cost is pretty much exactly what it sounds like. It’s what indicates how much it’s going to cost the business toacquire (or hire and onboard) a new customer. It’s normally calculated by dividing total sales and marketing spend by the number of new customers that are acquired during a given period.

So, for instance, if your startup spends £10,000 on marketing and sales in January and also gains 100 new customers in the same month, your CAC is £100.

That’s pretty simple, but the tricky bit is deciding what actually counts as acquisition costs. Advertising is an obvious one, but many companies also include other things like salaries, commissions, software subscriptions, agency fees, content production and other sales and marketing expenses. Thus, CAC can be quite different depending on the business.

Why Do Startup Founders Obsess Over CAC?

Wouldn’t it be lovely if the solution to making more money and growing a company was simply to bring in more customers? Indeed, it would be great, and although it’s not as easy as that, it’s still something you hear people say and talk about quite a lot. Profits down? Get more customers! Extra expenses this month? No worries, onboard some new clients.

Unfortunately, however, growth can be deceptive. A startup might be adding customers every week, generating positive headlines and attracting investor interest. But the problem is that if it’s spending £500 to acquire customers who only generate £100 in revenue, there’s a pretty obvious misalignment.

That’s why CAC is often discussed alongside another important metric: customer lifetime value (LTV). LTV estimates how much revenue a customer will generate throughout their relationship with your business. A healthy company generally wants lifetime value to comfortably exceed acquisition costs. Many investors and operators look for an LTV-to-CAC ratio of at least 3:1.

In other words, if it costs £100 to acquire a customer, you’d ideally want that customer to generate at least £300 in value over time. That would mean you’re making a decent amount of money and all the work you’re doing to attract the new customer and retain them will be worth it, so to speak, in the long run.

Why Is CAC Rising?

If founders feel like customer acquisition is getting harder, they’re not imagining it. Unfortunately, it is, and there are several factors that can account for this.

Digital advertising has become more competitive; customers are bombarded with marketing messages and many industries now face crowded markets filled with rivals chasing the same audience. According to recent benchmark data, customer acquisition costs also vary dramatically depending on industry, business model and customer type.

For instance, in SaaS, costs can range from a few hundred dollars for self-serve products to several thousand dollars for enterprise-focused businesses with longer sales cycles.

That’s why comparing your startup’s CAC with a completely different type of business rarely makes sense. A fintech startup selling regulated financial products will face a very different acquisition challenge from a consumer app trying to go viral on TikTok, so you simply can’t use the same model or formulas to calculate this.

Founders Often Make the Same Mistake 

One of the biggest traps is focusing entirely on reducing CAC. The problem with this approach is that simply having a lower CAC isn’t necessarily better or healthier than having a slightly higher CAC. It’s very much about what happens after this.

After all, if customers stay for years, buy additional products and generate recurring revenue, a higher acquisition cost may be perfectly reasonable. The real goal isn’t to acquire customers cheaply; it’s to acquire the right customers profitably.

The Metric Behind The Metric

CAC is really about efficiency. It helps founders understand whether their marketing works, whether their sales process is sustainable and whether growth is creating value or simply creating costs.

Getting new customers is important and necessary, but doing so sustainably and profitably is the most important, because that’s what allows a business to be built successfully over time.