If you’re a CMO or marketing decision-maker and don’t know your maximum allowable Customer Acquisition Cost (CAC), it’s time to take a hard look at your financials. And if you’re an ad agency that hasn’t worked with your client to define this number, you might be spending their money irresponsibly. Feel uncomfortable? You should. This topic is critical, but don’t worry—I’ll walk you through it.

What is Customer Acquisition Cost (CAC)?

Let’s break it down: CAC is the total amount spent to generate a sale, as in receiving revenue. Not leads, not clicks, not signups. It’s about securing paying customers not prospects.

Marketing often gets sidetracked by shiny metrics like conversions, impressions, or click-through rates. Those are fine for optimizing campaigns, but they don’t pay the bills. CAC cuts through the noise, focusing on the cost to acquire a real, revenue-generating customer.

Why CAC Matters

Over my career, I’ve founded and grown several companies, and I currently lead a digital marketing agency. I know firsthand that marketing must serve the business—not the other way around. It’s easy to get caught up in vanity metrics, but profitability is the ultimate goal. That’s why I push for a business-first approach with every client. Without profitability, marketing can become nothing more than an expense.

How to Assess Your Customer Acquisition Cost

1. Start with the Right Question

Many marketers confuse the cost of acquiring a lead or prospect with the cost of generating profit. They’ll say, “We have an average cost per conversion of $20.” But is $20 good or bad? Does that equate to a profitable transaction? You cannot know without first determining your Maximum Allowable CAC—the amount you can afford to spend while staying profitable. 

2. Calculate Your Maximum Allowable CAC

There are two main business models to consider when calculating CAC:

Model One: One-Time Sales

For businesses with one-time sales transactions, CAC is based on a single sale. Here’s a simplified example:

• ABC Company sells its product for $1,000.

• Fixed and variable costs (product, overhead, salaries, taxes, etc.): $600.

• Required profit: $200.

• Maximum Allowable CAC: $200.

In this case, you can spend up to $200 to acquire a customer and still achieve your desired profit margin.

Model Two: Repeat Customers or Subscriptions

For subscription or repeat-purchase models, calculating Customer Lifetime Value (CLV) may make more sense to allow for ample marketing spend while looking at profitability over one to five years. The example below uses first-year revenue only, as it’s more realistic and avoids pushing returns too far into the future. Example:

• Average first-year revenue per customer: $1,500. 
• First-year costs (product, support, etc.): $600. 
• Desired profit: $500 in year one; may increase in future years from ongoing customers.
• Maximum Allowable CAC: $400.

3. Use CAC to Guide Marketing Decisions

Once your Maximum Allowable CAC is defined, it becomes the foundation for all marketing efforts. The maximum budget per sale should guide all future efforts as it establishes a concrete marker to work and evaluate against. Rather than being reactive, marketers can now look forward, giving them the ability to forecast results and spend, make immediate and meaningful pivots, and have real context for profitable acquisition.

If your CAC is $100 and your average sale generates $1,000, that’s a 1:10 ratio. For every $1 spent, $10 comes back.

Adhering to your CAC, a $1,000,000 annual budget should produce $10,000,000 in gross sales. This ratio provides clear guidance for campaign performance, spend pacing, and profitability tracking. For CFOs, they can forecast profits.

CAC should trickle down through all marketing tactics and allow those steering these efforts to reverse engineer their settings. For example: When conducting a paid search campaign that historically shows that 1% of visitors become paying customers and the CAC is $200, the marketer knows they need to keep their cost per click at $2 or less to be profitable. Without CAC, how would the marketer know what the max CPC should be?

Addressing Common Objections

“We Can’t Predict All the Variables!”

Yes, marketing involves variables. But with proper tracking and collaboration between client and agency, CAC-driven marketing removes guesswork. It requires detailed data-sharing and transparency to align efforts with business goals. Clients will need to provide actual sales results.

“That’s Too Expensive!”

Think about it this way: if I told you that for every $100 you gave me, I’d give you $200 back, how much would you give me? As much as you could, right? That’s the logic of CAC. A $90 cost-per-click (CPC) might seem outrageous—until you realize your Maximum Allowable CAC is $1,000. On the flip side, a $2 CPC on Facebook might look like a bargain but could be worthless if it doesn’t generate sales, especially if the profit margin is only $1. CAC provides context, ensuring your marketing spend aligns with your profitability goals.

Next Steps: Make CAC the Centerpiece of Your Strategy

1. Define Your Maximum Allowable CAC – Work with your CFO, CMO, and/or COO to determine an accurate CAC.
2. Communicate the Metric Across Teams – Share it with your internal marketing team, your agency, and your stakeholders. This ensures everyone is working toward the same profitability goals. This will guide digital marketers on maximum costs per clicks, costs per impressions, cost per leads, and costs per sales.
3. Hold Everyone Accountable – Agencies, don’t ignore this metric. Push your clients to calculate their CAC and build strategies around it. Anything less is incomplete marketing—and that’s just irresponsible.

Conclusion

At Arc Intermedia, we approach every client engagement with one goal: measurable, profitable growth. Understanding and applying CAC isn’t optional—it’s essential. We are a digital marketing agency in the Philadelphia, PA area specializing in data-driven strategies for customer acquisition. Please feel free to contact us to get advice and support on championing CAC-driven marketing for your company.