What is Customer Acquisition Cost (CAC)? Definition, Formula, and Best Practices

Customer acquisition cost (CAC) measures how much your business spends to win a new customer. While startups and scale-ups closely track sales and revenue figures, customer acquisition cost is a more telling metric. Regardless of how many sales you make, if your expenses exceed your income, your business is not sustainable

Everyone from partners and investors to lenders and executives will look at your CAC. A lower CAC means you’re winning customers with comfortable margins, while a higher CAC indicates you need to find a way to cut expenses. That might mean:

• Choosing cheaper software and hardware solutions

• Accelerating deals

• Refining your targeting

• Improving your marketing and messaging

Your course of action will depend on things like your industry, competitors, marketing strategy, and resources. Below, we’ll walk you through everything you need to know about customer acquisition cost to better measure, monitor, and improve your CAC—and acquire customers for less.

What is customer acquisition cost (CAC)?

Customer acquisition cost is the total amount you spend to land a new customer. This isn’t just about your ad spend, though—it’s taking into account the salary of the person running your ads, the cost of behind-the-scenes creative, and what you pay for your tech stack.

It measures all your costs to win a customer.

CAC shows the efficiency of your marketing strategies. A lower CAC means you earn higher profits from every new customer—and that’s good for your business health and bottom line.

You should look at your CAC whenever you’re planning new marketing campaigns or sales initiatives. Understanding this metric helps you better allocate your marketing budget, streamline sales processes, and tweak product offerings.

Earning new customers will always require some costs, and that’s alright. You have to invest to win, especially in a competitive market or industry. It’s all about finding that sweet spot—where your return on investment justifies the spend. Sometimes, that means raising your prices. Other times, it means zeroing in on your customer acquisition costs and seeing where you can cut expenses, reduce your burn rate, and become more efficient.

Why measure and monitor your CAC?

Learning your CAC tells you what each new customer costs you, but that’s just the beginning. There are also broader implications and strategies you can take to influence your bottom line in the right direction.

Here’s why your CAC matters:

• Informs budget: Knowing your CAC helps determine how much you can afford to spend on acquiring customers while maintaining profitability.

• Drives efficiency: Monitoring your CAC promotes continuous optimization. Learning what works (and doesn’t) helps you focus your resources on high-performing channels and tactics. That might mean spending less on paid ads and more on content marketing and email marketing.

• Supports sustainable growth: A lower CAC means you can scale faster and more sustainably. If it costs less to acquire new customers, you can accelerate growth without proportionally increasing your spending (especially when you factor in economies of scale).

• Helps with forecasting: Calculating your CAC in relation to other financial metrics (such as the Lifetime Value (LTV) of a customer) helps you forecast future revenue and make informed product development and market expansion decisions.

• Improves investment appeal: A competitive CAC shows that your startup has a scalable customer acquisition strategy—and that’s something investors want to see before they trust you with their money.

“A customer acquisition cost shouldn’t be measured independently,” says Khozema Shipchandler, CEO of Twilio. “It needs to be measured in relation to customer lifetime value. This has become a top priority for CFOs as the digitization of business has forced businesses to build direct relationships with their customers.”

How to calculate customer acquisition cost

Fortunately, it’s simple to calculate your customer acquisition cost. Just use the CAC formula.

The formula to calculate CAC is:

CAC = Total Marketing Expenses / Number of New Customers Acquired

While the customer acquisition cost formula is pretty easy to follow, you might need a little help with the two factors:

1. Marketing expenses

2. Number of new customers

Breaking down “marketing expenses”

Marketing expenses here include all the costs associated with attracting and winning new customers:

• Advertising costs: This includes all media buys, pay-per-click (PPC) advertising, social media ads, and any other paid promotional activities.

• Salaries and wages: The total compensation of your marketing and sales teams, including base salaries, commissions, and bonuses—anything directly related to customer acquisition.

• Creative costs: Any expenses related to creating marketing materials, such as content production, graphic design, and video production.

• Software and tools: Costs for marketing automation software, CRM tools, AI marketing tools, analytics tools, and other software that supports marketing and sales activities.

• External services: Fees paid to agencies or consultants who help manage your marketing strategies.

Defining “new customers”

Your “new customers” are typically first-time buyers. However, that might look different depending on your business model and products and services. There’s not necessarily a one-size-fits-all answer.

It could mean:

• First-time buyers: Individuals or businesses making their first purchase.

• New subscriptions: For subscription-based models, a new subscriber who has committed to a recurring payment.

• Free to paid conversions: In a freemium model, existing customers who upgrade from a free plan to a paid plan.

How to improve customer acquisition cost

Your path to profitability and scale involves improving your CAC. The lower you drive CAC, the higher your earnings potential. Try these strategies to improve your customer acquisition costs:

Optimize your marketing campaigns

Regularly look at your marketing campaigns’ performances. Deep dive into the data to figure out what’s working and what’s not.

You might see that your email marketing program drives the highest ROI—in that case, double down and see if you can scale the program with additional budget. Borrow the funding from underperforming channels to help you grow without further investment.

Run A/B testing to see where you can improve. Experiment with different aspects, such as your landing pages and marketing campaigns. You might lose some money on the initial tests, but your findings could reduce overall marketing spend moving forward.

Boost conversion rates

Use customer segmentation to divide your user base into smaller cohorts and tailor your marketing messages. You want to send the right message to the right person on the right channel at the right time.

While a batch-and-blast approach takes less time to pull off, it’s less targeted—and that means less effective. It might lead to a handful of conversions, but it could also potentially annoy and alienate potential customers.

Leverage organic growth channels

Invest in search engine optimization (SEO) and produce high-quality content that addresses your target audience’s needs and questions. SEO is a long-term strategy—you won’t see the results of your marketing efforts for months (at least). However, once it starts working, you dramatically reduce your direct marketing costs per acquisition.

Another growth channel is organic social media. If you can build a large, loyal following, they’ll see your published content without any additional advertising spend. Still, building this following takes time and investment, but it can pay dividends in the long run.

Use the right tools and platforms

Use marketing automation tools to streamline repetitive tasks. You can automate everything from email marketing and social media posting to advertising campaigns and reporting. Eliminating this manual work frees your staff to work on more cost-effective strategies and implementation.

Also, consider your infrastructure fees. Building your website or application with a cost-effective solution like DigitalOcean gives you more scalable computing options. That means lower expenses and lower expenses mean a better customer acquisition cost.

Explore AI marketing strategies

AI can be a powerful ally for marketers aiming to reduce their CAC. AI for sales tools and conversational AI platforms can automate lead qualification and personalize outreach, allowing marketers to prioritize high-potential prospects and streamline the sales process. These AI tools can analyze large data sets to identify the most promising leads, tailor messaging to individual preferences, and even handle initial conversations, freeing up marketing and sales teams to focus on closing deals.

Meanwhile, generative AI apps and AI email assistants can create engaging, personalized content at scale, boosting the effectiveness of email marketing campaigns and driving higher conversion rates. By leveraging AI email marketing, businesses can deliver highly targeted, relevant content to each recipient, increasing the likelihood of engagement and conversion.

Examples of CAC in different use cases

Customer acquisition costs vary across industries and use cases. A good customer acquisition cost in retail might be a terrible CAC for a software business. Factors like market saturation, customer value, competition, and the price of the product all play a role.

Think about a car dealership. They might spend thousands of dollars to acquire a customer, but that’s a small percentage when they convince a buyer to spend $50K on a brand-new vehicle.

Let’s take a look at CAC examples across different use cases:

Software as a service (SaaS)

Tech startups (particularly in the SaaS world) often face high upfront CAC—that’s because they need to quickly gain market share in competitive areas.

For example, a SaaS company might spend heavily on digital marketing campaigns, trade shows, and sales teams to acquire enterprise-level customers. However, the lifetime value of these customers often justifies the high initial investment.

E-commerce

E-commerce CACs range based on product type and target market, but they generally involve online advertising, SEO, and email marketing expenses. These businesses might use targeted ads on Facebook and Google to attract new customers, increasing CAC.

To be successful, e-commerce businesses have to optimize their campaigns to reach (and convert) customers for less.

AI/ML startups

AI/ML startups face huge initial CAC. They have to invest heavily in talent acquisition, technology development, and extensive computing resources—and that’s just to build the solutions, not to mention selling them.

Lower your customer acquisition costs with DigitalOcean

Mastering your customer acquisition costs is more than just a numbers game—it’s about pushing your business toward sustainable profitability. Whether you’re a massive enterprise, a fresh new startup, or an AI innovator, lowering your CAC will always be a top priority.

Fortunately, we can help. Here’s how DigitalOcean can lower your CAC:

• Scalable infrastructure: Adjust resources as your customer base grows while only paying for exactly what you need.

• Predictable pricing: Transparent pricing models help you budget accurately and avoid unexpected costs.

• Global reach: DigitalOcean’s extensive network of data centers allows you to extend your services worldwide with minimal latency.

• Developer-friendly: Save time and reduce labor costs with simple (yet powerful) tools that let your team focus more on product development and less on managing infrastructure.

Want to see how DigitalOcean can lower your customer acquisition costs? Sign-up for DigitalOcean.