Startup & Venture Basics Beginner

Customer Acquisition Cost (CAC)

The average cost to acquire one new customer, including sales and marketing spend.

Definition

CAC is calculated by dividing total sales and marketing expenses by the number of new customers acquired in a period. It includes salaries, ad spend, tools, and any other costs directly tied to winning customers. A sustainable business needs the lifetime value of a customer to be significantly higher than the CAC, typically 3x or more.

Why it matters

If CAC is too high relative to what customers pay, the company burns cash faster and may need to raise more capital (diluting you). Efficient CAC means the company can grow profitably and your equity is safer.

Example

A company spends $300K on sales and marketing in Q1 and acquires 100 new customers. CAC is $3,000. If each customer pays $1,000/month and stays for 24 months, LTV is $24,000, giving an LTV/CAC ratio of 8x.

Related terms

Lifetime Value (LTV)
The total revenue a company expects to earn from one customer over the entire relationship.
CAC Payback Period
The number of months it takes to recoup the cost of acquiring a customer from their revenue.
Burn Rate
How much cash a company spends per month beyond what it earns.
Magic Number
Measures sales efficiency: net new ARR divided by sales and marketing spend in the prior period.
Gross Margin
Revenue minus the direct costs to deliver the product, expressed as a percentage of revenue.

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This definition is an educational summary. It is not legal, tax, or investment advice. Specific terms in your equity grant or company documents may differ.