Customer Acquisition Cost

Anyone who wants to sell something has to spend money first. It takes advertising, a website, and often people who call and advise prospective customers. Customer Acquisition Cost is the term for the costs that arise on average until a new customer has been won. To calculate it, all expenses for advertising and sales within a given period are added up and divided by the number of newly acquired customers. If a company spends 100,000 euros in a month and gains 500 customers, the figure comes to 200 euros per customer. The metric is almost always abbreviated as CAC.

The comparison that decides profit or loss

A number alone says nothing. 200 euros per customer is laughably little for a bank and ruinous for an online shop selling socks. That is why CAC is always considered in relation to what a customer brings in over the years. This expected total revenue from a customer is called Customer Lifetime Value.

As a rough rule of thumb in the industry: a customer should, over their entire relationship with the company, generate at least three times as much as it cost to acquire them. If the ratio falls below that, the business model is at risk. If it lies far above that, the company may be spending too little on growth and giving away market share to competitors.

For investors, CAC is therefore one of the first figures they ask about. A start-up can show steeply growing user numbers and still be a bad investment. If every new user costs more than they will ever bring in, faster growth only makes the losses bigger. This exact mistake has pushed many delivery services and streaming providers into the red.

What belongs in the calculation

The numerator of the calculation covers more than just booked ads. It includes salaries in marketing and sales, customer relationship management software, trade show booths, discounts for new customers, and commissions for referral partners. What does not belong in it are costs unrelated to acquisition, such as rent, accounting, or support for existing customers.

This is exactly where the weakness of the metric lies. There is no legal requirement for what must be included. A company can make its CAC look good by booking parts of its marketing spend as something else. When reading company figures, it is therefore worth taking a look at the footnotes.

A second problem is timing attribution. Anyone who runs ads today may only win some customers half a year later. Dividing one month’s expenses by that same month’s customers creates distortions as a result. Careful companies therefore look at longer time periods or track individual customer cohorts over months. It is also useful to calculate the figure separately per channel, since customers acquired through search engine advertising often cost a multiple of customers who come through referrals.

CAC in quarterly reports and in the AI business

The term appears regularly in news about publicly traded technology companies. When a subscription software provider reports that its customer acquisition costs have risen, that is a warning sign for the stock. Often behind it lies a saturated market or a competitor undercutting with discounts. Conversely, companies celebrate falling CAC figures as proof that their brand is well-known enough.

The metric is also topical in the AI sector. Providers of chatbots and assistant software compete for the same corporate customers, driving advertising prices upward. At the same time, many companies are lowering their own CAC by having software handle initial consultations and proposal creation instead of sales staff.

Anyone wanting to calculate the figure themselves doesn’t need a company to do it. Even with a school project using flyers and Instagram ads, one can ask: how much money was needed for a person to actually make a purchase? This way of thinking is the core of the concept.