The guide
What is customer acquisition cost?
Customer acquisition cost (CAC) is the average amount you spend to win one new paying customer. It counts everything that goes into winning them, not only ad spend: agency and software fees, and the time your team spends selling.
CAC = total sales and marketing spend ÷ new customers won
Measure both numbers over the same period, and count paying customers, not leads. If you spend $10,000 in a month and win 20 new customers, your CAC is $500.
What is customer lifetime value?
Customer lifetime value (LTV, or CLV) is the gross profit an average customer brings in over the whole time they buy from you. Use gross profit, not revenue: only the margin is left to pay back what the customer cost to win.
LTV = revenue per customer a year × gross margin × years they stay
A customer who spends $3,000 a year at a 50% margin and stays 3 years is worth $4,500 in gross profit.
What is CAC payback period?
Payback period is how many months of a customer’s gross profit it takes to earn back what they cost to win. Until then, that customer is a cost you have paid up front.
Payback months = CAC ÷ gross profit per customer a month
In the example, each customer earns $125 of gross profit a month, so a $500 CAC pays back in 4 months.
What is a good LTV to CAC ratio?
Divide lifetime value by CAC. The two rules of thumb most often used, which began in subscription software and are now applied far more widely, are:
- an LTV to CAC ratio of at least 3 to 1, measured on gross profit
- a payback period under 12 months
They are guides, not laws. A business with steady cash and long contracts can live with a longer payback; a business that buys stock up front needs a shorter one. Below 1 to 1, though, every new customer loses money, and spending more makes it worse.
Customer-funded growth: why payback matters most
Every new customer costs money before they make you any. The payback period decides how long that money is tied up, and so how fast you can grow before you run short of cash.
When payback is short, growth funds itself. The gross profit from last month’s customers pays to win this month’s, and you can spend more as fast as the customers come back. We call this customer-funded growth. When payback is long, the same growth needs a loan, an overdraft or an investor to cover the gap, and a bad month becomes a cash problem.
That is why we treat a shorter payback as the first goal of any growth plan, ahead of more spend. It is also why our 90-Day Growth Guarantee is judged on a number from your own records, such as revenue from new customers, rather than on clicks or rankings.
How to lower your customer acquisition cost
- Convert more of who you already reach. Faster replies to enquiries, a clearer offer and a better landing page lower CAC without spending a dollar more on ads.
- Measure CAC by channel. A blended number hides the channel that is losing money. Move spend toward the lowest cost per paying customer, not the lowest cost per click.
- Keep customers longer. Retention does not change CAC, but it raises lifetime value, which improves the ratio and the payback for every repeat purchase.
- Build search that keeps working. SEO takes months to build, then brings customers without a cost per click, which pulls the average CAC down over time.