CAC and payback

Customer acquisition cost, or CAC, is the total cost of winning new customers in a period, including advertising, sales salaries and commissions, tools and the cost of free estimates or trials, divided by the number of new customers won. Payback is CAC divided by the monthly contribution a customer produces, giving the number of months before the customer has paid for the cost of winning them.

The two numbers decide how much a BC company can afford to spend on growth and how long its cash will be tied up doing it. A company with a payback of three months can grow aggressively from its own cash. A company with a payback of eighteen months needs outside funding to grow at all, and needs to be sure the customer stays long enough to pay back. The averages hide the answer, because channels differ widely, and the blended number usually has one channel quietly losing money inside it.

In practice, we calculate CAC and payback by channel and by segment from actual spend and actual contribution, not from a target, and we use them to set marketing budgets, commission plans and the growth rate the cash can support. For startups, they are on the first page of the investor update. Ali's marketing agencies work from the same numbers on the acquisition side.