What is customer acquisition cost?

Definition

Customer acquisition cost is sales and marketing spend divided by the number of new customers those efforts won. On the books, this is a unit cost of winning new accounts, not a ledger account you debit.

People often shorten the name to CAC after the full name. The figure asks what it cost to bring one new customer in, not what that customer will produce over the relationship.

It is not an Income Statement line by itself. Marketing expense already sits on that statement; this reading divides that spend by the new customers won.

Stay with the cost to win one customer when you read it. The total margin a customer is expected to produce before leaving is a different page.

Where it shows up

P&L: Related to sales and marketing spend against new customers won.

Cash flow: Related to when that spend actually left the bank.

Balance Sheet: Related to nothing sitting as an account unless prepaid ads remain.

See also: Marketing Expense · Customer Lifetime Value · Payback Period

When you look at your Income Statement, take the sales and marketing spend for the period. Then divide by the number of new customers won in the same window.

When the figure is high, each new account cost more to win. When it is low, the same spend brought in more customers, or the campaign was cheaper.

Prepaid expenses can hold unused ad credits on the Balance Sheet. This page uses the spend that actually hit the period, not the prepaid remainder.

On the Statement of Cash Flows, the cash left the bank when the show was paid, which may be a different month than the expense. This page stays on the cost per new customer, not on the cash timing alone.

A payback period asks how long until extra cash covers an outlay. Owners often pair that clock with this cost once they know what one new account cost to win.

How it works

Add the sales and marketing spend used to win new customers. Divide by the number of new customers won.

$6,000 spent on a wedding show that wins 15 new accounts is $400 per customer. Write it in dollars so the cost is easy to compare across campaigns.

Stay with new customers in the denominator. Counting every returning wedding client as new makes the cost look cheaper than it was.

Include the show fee, ads, and the sales time that sat in payroll if you want a full read. Leaving labor out makes the figure look smaller than the true cost to win the account.

Revenue from those new accounts is not subtracted here. This page is the cost to win them, not the leftover after the first order.

Contribution margin on the first orders is what starts to cover this cost. How long that takes is a payback question, not this unit cost.

This page stays on the cost to win one customer. The total margin a customer is expected to produce before leaving belongs on another page.

Example

Stem & Petal, a florist, spends $6,000 on a wedding-show booth. The show wins 15 new accounts.

Divide: $6,000 by 15. CAC is $400.

That $400 is the average spend to win one new customer. It is not the margin those accounts will produce over the relationship.

If the same $6,000 had won only 10 accounts, CAC would be $600. The cost moved because fewer customers came in, not because the booth fee changed.

If the show won 20 accounts, CAC would be $300. More customers on the same spend lowers the cost.

If $2,000 of unused ad credit remains as a prepaid, only $4,000 of spend hit this period. Dividing $4,000 by 15 would be a different, lower reading, and it would still be this metric with a tighter spend total.

The shop does not post a line that says this cost. The books already hold the marketing spend and the new-account count; you divide.

Common mix-ups

This cost is not the same as customer lifetime value. Lifetime value is the margin a customer is expected to produce; this page is what it cost to win them.

This cost is not the same as marketing expense. Marketing expense is the period total; this page is that spend divided by new customers won.

This cost is not the same as cash that already left the bank. A $400 reading can sit as a prepaid ad credit until the campaign actually runs.

Related terms

• Marketing Expense: The cost of advertising, campaigns, and demand generation.
• Customer Lifetime Value: The total margin a customer is expected to produce before leaving.
• Churn Rate: The share of customers or revenue lost over a period.
• Revenue: The total value of goods and services the business earned in a period.
• Contribution Margin: Revenue minus variable costs, showing what is left to cover fixed costs.
• Payback Period: How long it takes an investment to return its own cost in cash.
• Bookings: The contract value signed in a period, whether or not it has been billed.
• Average Order Value: Average revenue per customer order in a period.