Customer acquisition cost: how to work out what a new customer really costs

Short answer: customer acquisition cost, or CAC, is what it costs on average to win a new customer. You calculate it by dividing all your sales and marketing costs over a period by the number of new customers in the same period. The figure only becomes useful when you compare it with what a customer is worth. A common rule of thumb is that customer value should be at least three times your acquisition cost.

How to calculate customer acquisition cost

CAC = sales and marketing costs ÷ number of new customers

Investor David Skok, who popularised the measure, puts it like this: take the entire cost of sales and marketing over a period, including salaries, and divide it by the number of customers you acquired in that period (For Entrepreneurs).

Example: a consultancy spends £6,000 on ads in a quarter, £3,000 on tools and an agency, and £21,000 on the salaries of a salesperson and a marketer. That is £30,000 in total. In the quarter it wins 12 new clients. £30,000 ÷ 12 = £2,500 per client.

What should you include?

The most common mistake is to count only the ad budget. That makes customers look far cheaper than they are. Include (CFI, HubSpot):

Count only new paying customers, not leads or repeat customers, and measure costs and customers over the same period.

CAC, cost per lead and cost per acquisition

In Google Ads you can also bid towards a cost per acquisition with Target CPA, where you set the average cost per conversion you want (Google Ads Help). In the example above, the ads alone gave £500 per client, a fifth of the real cost.

Compare with customer value

A client who costs £2,500 to win can be an excellent deal, or a disaster. It depends on what the client is worth over time, the customer lifetime value, LTV or CLV. Calculate it as the gross profit an average customer brings over the whole relationship.

Two rules of thumb from David Skok have become standard, especially for businesses with recurring revenue (For Entrepreneurs):

• Customer value should be about three times CAC.
• The cost should be earned back within twelve months, otherwise growth needs too much capital. The best SaaS companies earn it back in five to seven months (For Entrepreneurs).

Continuing the example: the consultancy's clients bring an average of £1,200 a month in gross profit and stay for 18 months. Lifetime value is £21,600, more than eight times CAC, and the cost is earned back in just over two months. There is room to invest more in sales.

What is a reasonable CAC?

There are no reliable UK figures. US agency First Page Sage publishes averages from its clients, such as around $240 for B2B SaaS, $530 for business consulting and $780 for financial services (First Page Sage). These come from one agency's clients and are only a rough guide.

Ad costs are part of the picture. According to LocaliQ, average cost per click in search ads rose slightly over the past year, while cost per lead fell for the first time in five years (LocaliQ). The best comparison is still your own CAC over time and by channel. For online shops, acquisition cost goes hand in hand with ROAS.

Seven ways to lower your acquisition cost

1. Calculate by channel. Split cost and new customers across ads, search, outreach and referrals. One channel is often far more expensive than the others.
2. Raise conversion. More customers from the same traffic lowers cost directly. Clearer landing pages and shorter forms are often the cheapest route. Read What is a good conversion rate?
3. Build organic visibility. Customers who find you through Google or AI search cost nothing per click. It takes time, but cost per customer falls the longer it runs. Read What is SEO?
4. Target the right customers. A narrower audience gives fewer but cheaper and better deals.
5. Contact the right people directly. Personal outreach to decision-makers can win meetings without an ad budget. For ClimateHero, just over 1,600 targeted emails produced ten qualified sales meetings without a penny on ads. Read more in Outbound sales.
6. Shorten the sales cycle. Every week a deal drags on costs sales time. Clear prices and good material speed things up.
7. Get more referrals. Happy customers and good reviews are the cheapest channel of all.

Common mistakes

• Only the ad spend. Gives too low a figure and poor decisions.
• The wrong period. Long sales cycles mean one quarter's costs bring the next quarter's customers. Use a rolling twelve months.
• Averages that hide differences. One big client and ten small ones give the same average as eleven medium ones.
• Chasing the lowest cost. Cheap customers who leave quickly are expensive in the long run.