Customer Acquisition Cost and Payback, Without the Jargon
Short Answer: Divide what you spent on marketing by the number of new customers it brought in. That's your customer acquisition cost. Then compare it with what one customer earns you after direct costs: how many weeks or months until they've paid it back, and how much they earn you over the whole time they stay. You can afford to spend up to the point where a customer pays back well within the time you can wait for the cash.
"Is our advertising working?" usually gets answered with a feeling: the phone rang a lot, or it didn't. Two numbers replace the feeling. One says what a customer costs. The other says what that customer is worth. Neither needs a marketing degree.
What Is Customer Acquisition Cost?
Customer acquisition cost (often shortened to CAC) is the marketing and selling money you spend to win one new customer. The formula:
Customer acquisition cost = (marketing + selling costs) ÷ new customers won
Take a hypothetical landscaping company, Greenline Landscaping: one owner, a crew of four, about $520,000 a year in revenue. In season it spends $1,500 a month on local ads. The owner closes every sale, so selling adds nothing.
| One month of advertising | Amount |
|---|---|
| Ad spend | $1,500 |
| Inquiries | 40 |
| Cost per inquiry | $37.50 |
| New customers (25% of inquiries) | 10 |
| Cost per new customer | $150 |
On its own, $150 means nothing. It could be a bargain or a disaster, depending on what a customer is worth.
How Long Until a Customer Pays Back What They Cost?
A customer doesn't pay you back with revenue. They pay you back with contribution: the price minus the direct cost of serving them. That's the money left to cover overhead and profit.
Payback = acquisition cost ÷ contribution per visit (or per month)
Greenline's two main customer types pay back at very different speeds:
| Weekly mowing customer | Commercial contract | |
|---|---|---|
| Price | $55 a visit | $1,800 a month |
| Direct cost | $42 a visit | $1,080 a month |
| Contribution | $13 a visit | $720 a month |
| Payback on $150 | about 12 visits | about 6 days |
A mowing customer takes about 12 weekly visits, roughly three months, to earn back their $150. A commercial contract earns it back in its first week. Both pay back within the season, so both are worth winning at this price.
What Is a Customer Worth Over Time?
Lifetime value is the total contribution a customer brings in over the whole time they stay with you. It depends on one number most owners never measure: how long customers stay.
Greenline bills its commercial contracts from April through October, seven months a year. Assume the average client stays three years. That is an assumption for this example; landscaping contracts are often rebid each year, and your own records are the only real source.
| Commercial contract lifetime value | Amount |
|---|---|
| Contribution per billed month | $720 |
| Billed months a year | 7 |
| Years the average client stays (assumed) | 3 |
| Lifetime contribution | $15,120 |
| Cost to win (from the ads) | $150 |
That's about 100 times the cost to win the contract. Even at 20 times the ad cost, once the owner's hours spent on site visits and a written bid are counted, the contract would be one of the best investments in the business.
A mowing customer earns far less. Over a season of about 30 weekly visits, one lawn brings in $390 of contribution, 2.6 times its cost. Whether they come back for a second season decides whether they're a good customer or a break-even one.
So How Much Should I Spend to Get a Customer?
Three checks, in order:
- Payback against your cash. A customer who pays back in three months is fine for a business with a cash cushion. The same customer can strain a business that's already tight in April. Many owners aim for payback well inside a year.
- Lifetime value against cost. A common rule of thumb is lifetime value at least three times acquisition cost, which leaves room for the overhead the customer also has to help pay.
- The cost of the next customer, not the average one. Doubling the ad budget rarely doubles customers. Suppose Greenline raised spend to $2,500 and won 14 customers instead of 10 (a hypothetical). The average cost rises only to about $179, but the extra $1,000 bought 4 customers at $250 each. At $250, a mowing customer takes about 19 visits to pay back, still inside the season.
What to Look For
- Acquisition cost by customer type. A blended $150 can hide a cheap residential lead and an expensive commercial one. If you can tell which ads bring which customers, split them.
- How long customers stay. Lifetime value swings more on this than on any other number. Count how many of last year's customers are still with you.
- Cost per inquiry against conversion. If inquiries hold steady but fewer turn into customers, the problem is the quote or the follow-up, not the ads.
What a Finance Consultant Would Do Next
A consultant looking at Greenline would split the $150 between mowing and commercial customers, because the two are worth very different amounts. They would test whether some of the ad budget should move toward winning commercial contracts, and check how many mowing customers renew each spring before deciding how much a new lawn is worth.
That analysis is what Occam's Model runs on your own books. You tag each marketing and sales cost to the revenue it supports, it grades your marketing efficiency against businesses like yours, and it lets you test a change in marketing spend on a copy of your business before you commit. When you need extra help, an expert can review it with you.
Common Questions
What counts when I calculate acquisition cost?
Everything you pay to win new customers: ads, listing sites, printed mailers, a share of any
marketing help you pay for, and the pay, commission and tools of anyone paid to close the sale.
Leave out costs for serving existing customers.
What if most of my customers come from referrals?
Referral customers cost little or nothing to win, so count them separately. Blending them in
makes paid ads look cheaper than they are.
What is a good customer acquisition cost for a small business?
There isn't one number. A good cost is one your customers pay back quickly and several times
over. A $150 customer is cheap if they earn you $720 a month and expensive if they earn $13 once.
How do I work out lifetime value if I'm new?
Use a cautious guess for how long customers stay, such as one season, and replace it with real
numbers once you have a year of records.