Financial Glossary
Customer Acquisition Cost
Customer Acquisition Cost (CAC) is the total cost incurred to acquire one new paying customer over a defined period. It is calculated as Total Sales and Marketing Expenses divided by Number of New Customers Acquired in the same period. Total costs should include advertising spend, salaries and commissions for sales and marketing staff, agency fees, and any tools or software directly supporting acquisition. CAC is evaluated in relation to Customer Lifetime Value (LTV): the LTV-to-CAC ratio measures how much value is generated per dollar spent acquiring customers. A ratio above 3.0x is commonly cited as healthy for SaaS; below 1.0x means the business is losing value on each customer relationship.
Problem & Application
A campground reservation software company spends $30,000 per month on sales and marketing (two sales reps at $8,000 each in total compensation, $10,000 in digital advertising, and $4,000 in tools and events). The company acquires 20 new campground customers per month. CAC equals $30,000 divided by 20, or $1,500 per customer. If the average contract value is $1,800 per year and the average customer stays for 4 years, LTV equals $7,200 (ignoring expansion revenue and discounting). The LTV-to-CAC ratio is $7,200 divided by $1,500, or 4.8x, a healthy signal. However, if sales cycles lengthen and the team acquires only 12 customers in a month while spending the same $30,000, CAC spikes to $2,500 and the ratio drops to 2.9x, approaching a threshold where investors would question unit economics. CAC payback period, months of revenue needed to recoup acquisition cost, is a complementary metric: $1,500 CAC divided by $150 monthly revenue equals a 10-month payback.
In Short
Reducing CAC while maintaining growth is key to profitability. Companies should refine targeting strategies and increase conversion rates.