Define CAC and its importance.

• A. Customer Acquisition Cost is the cost to acquire a new customer; used to assess profitability and marketing efficiency.
• B. CAC is the cost of maintaining existing customers.
• C. CAC is the total company revenue.
• D. CAC is the cost of producing goods.

Answer: (A)

CAC, or Customer Acquisition Cost, is the amount you spend to acquire a new customer. It’s important because it directly informs profitability and marketing efficiency. You figure CAC by dividing the total sales and marketing expenses in a period by the number of new customers gained in that same period.

This metric matters because it answers whether the money spent to grow the customer base is sustainable. By comparing CAC to what a customer is worth to the business over their lifetime (the lifetime value, or LTV), you can assess ROI and decide how aggressively to spend on marketing. A healthy setup is where LTV comfortably exceeds CAC, signaling profitable growth; if CAC nears or exceeds LTV, spending may be out of balance and requires optimization.

CAC also helps pinpoint which channels or campaigns are most effective, guiding budget allocation and optimization. For example, if one channel yields a lower CAC than others, prioritizing that channel can improve overall profitability.