Log #042 | How to properly define CAC

CAC is the first metric that every Marketer learns and is often painted as “Oh, it’s simply Customer Acquisition Cost”. But, over my career, I’ve measured CAC 15 different ways and every time I talk to a marketer about CAC they have a concern or question about it. CAC is so much more nuanced than people give it credit for.

There’s a golden rule for metrics that they should be:

And while LinkedIn might convince you that CAC is a bad metric, there’s a reason it still matters. CAC nails the golden rule. It’s the cleanest way to see if your acquisition efforts are working and whether it’s efficient.

It’s also universally understood. Finance gets it. Growth gets it. Product gets it. That makes it a key internal metric. Externally, investors and shareholders expect it. Even if you use another methodology, they’ll still ask for CAC. That makes it a key external metric. Having a metric be both key internally and externally creates a level of stickiness that is hard to replace. So, CAC isn’t going anywhere anytime soon.

Throughout this article, I’ll show you where the traps are and how to make CAC work for you.

CAC is a ratio, which means it has a numerator and a denominator. Obvious but we’re going to break apart each component and dig deeper into them.

Marketing Spend can mean a lot of things and it can cover a lot of things. Everything from Paid Spend to headcount should eventually be included in Marketing Spend. Why eventually? Because I believe that the definition of Marketing Spend should evolve with the stage of the company.

Example

Take the example of a pre-seed founder. They’ve just read on LinkedIn that CAC should include all costs, from marketing to headcount. Their salary is $100,000. They run a $50 Meta test. If they include their salary, their CAC suddenly looks like $10,000. They don’t know their LTV yet, and now the number is telling them the business doesn’t work. That conclusion would be completely wrong.

So, how do you avoid this? The definition of Marketing Spend should align with the stage of the company and the goal of marketing at that stage.

Stage 1 is about finding product-market fit. And the goal of Marketing is to see if it can find the target users. It’s not about efficiency. So, Marketing Spend should simply be defined as the money you’re putting directly into advertising.

Let’s say you estimate an LTV of $25 using hand wavey math. You run an experiment and the CAC comes in at $50. You can cut that in half over time through optimizations, a smoother funnel, and stronger brand awareness. But if your CAC is $10,000 just on marketing spend alone, the only way that makes sense is if you have a matching LTV, which is rare in consumer tech.

The point of this first stage is not precision. It’s to get a rough calculation that tells you if there’s a path to finding product market fit.

Trap

Most people know to include Paid Spend. This covers advertising on channels like Meta, Google, TikTok, or anywhere you’re paying for distribution. That part is straightforward.

But what about referral? If you give $10 to the referrer and $10 to the referee, that’s spend too. The same goes for affiliate payouts. You have to remember to include this. If money is directly going out the door to acquire a customer, it should be included in Paid Spend.

Stage 2 comes once you’ve found product-market fit and you’re starting to accelerate. Here the goal of Marketing is to find a repeatable motion. You’re still experimenting and testing, but you’ve got a decent foundation for the customer journey.

Here you should layer in costs that keep the engine in motion that aren’t tied to headcount.

The idea here is to capture what it costs to keep the Paid Ads going.

Stage 3 is when you’re moving into scale-up mode. Here the goal of marketing is to create a sustainable acquisition engine.

You’ve got a repeatable GTM engine, product-market fit is no longer the question, and you’re comfortable with your monthly spend. At this stage, you’re likely to have one or two channels working well.

Now you want to account for MarTech costs and immediate headcount. These are the tools you need to support higher spend ( attribution or analytics ) and the people directly responsible for acquisition. That could be your marketing managers, an agency, or whoever is pulling the trigger.

The goal here is to understand if the acquisition team itself is profitable, or how close it is to profitability. You’re not optimizing for the entire company’s headcount, but you are for the immediate team running acquisition.

Stage 4 is where we get into the less defined territory. By now you’ve been in stage 3 for a few years. You’re a known brand in the space and you’re starting to invest in bigger teams and brand building. The goal of Marketing moves into creating a sustainable and global (or mass market) presence.

This is where you fold in costs like Data science and your broader performance marketing team. At this stage, CAC needs to reflect the full engine you’ve built around acquisition.

Stage 5 is when you’ve become a market leader. You’ve been around for a decade, your brand is established. The goal of Marketing is to create a sustainable and long lasting Brand.

Here you include everything in your CAC:

What Marketing is trying to prove is that the entire Marketing engine is profitable.

When in doubt, lean conservative. The worst outcome is realizing too late that you’ve been undercounting your spend. This exercise is about balance: accounting accurately, motivating your team, and staying realistic about efficiency.

What about Brand Marketing Spend?