What Is CAC?

Customer Acquisition Cost (CAC) is the total cost of acquiring a new customer, calculated by dividing total sales and marketing expenses by the number of new customers acquired in a given period. It's one of the most scrutinized metrics in startup economics, directly impacting profitability, valuation, and runway.

Why CAC Matters for Modern Startups

CAC determines whether your business model works. If it costs $500 to acquire a customer worth $400, you're losing money on every sale—and you can't make it up on volume.

For startups with limited runway, CAC efficiency is existential. Every dollar of acquisition cost is a dollar not available for product development, hiring, or extending runway. Investors scrutinize CAC:LTV ratios obsessively. A ratio below 1:3 raises red flags about unit economics.

The pressure is intensifying: median CAC has increased 60%+ over the past five years as ad costs rise and competition increases. Efficiency isn't optional—it's survival.

How CAC Works

1. Sum all acquisition costs—ad spend, marketing salaries, tools, content production, sales costs

2. Count new customers acquired in the same period

3. Divide costs by customers to get CAC

4. Compare to LTV (Lifetime Value) to assess unit economics

5. Track over time to identify efficiency trends

CAC vs Related Terms

CAC vs CPA (Cost Per Acquisition): Often used interchangeably, but CPA sometimes refers to any conversion (lead, signup) while CAC specifically means paying customers.

CAC vs LTV: LTV is revenue from a customer over their lifetime. The CAC:LTV ratio determines profitability. Target is typically 1:3 or better.

CAC vs Payback Period: Payback period is how long until a customer's revenue covers their CAC. Shorter is better—especially for startups needing cash efficiency.

Common Misconceptions About CAC

"Lower CAC is always better." Not if it means acquiring worse customers. CAC should be evaluated alongside LTV and customer quality.

"CAC only includes ad spend." It should include all acquisition costs—salaries, tools, content, overhead. Partial CAC calculations create false confidence.

"Organic customers have zero CAC." They don't. Content, SEO, and brand investments that drive organic acquisition have real costs that should be allocated.

When CAC Is Not the Right Focus

In very early stages, learning speed matters more than CAC efficiency. Paying more to acquire customers faster can accelerate product-market fit discovery.

For marketplace and network-effect businesses, initial CAC may be intentionally high to build the critical mass needed for the model to work.

How This Connects to Modern Workflows

CAC efficiency improves through execution velocity (more output from same investment), channel optimization (finding efficient acquisition paths), and tool consolidation (reducing overhead costs).

→ What Is Marketing Attribution?

→ What Is Growth Marketing?

→ What Is Product-Led Growth?