Customer acquisition cost

Customer acquisition cost is the average amount a company spends to win one new customer. It's calculated by dividing total sales and marketing spend over a period by the number of new customers gained in that same period, and it's one of the core metrics investors use to judge whether a company's growth is actually profitable or just expensive.

The formula is:

A company can grow revenue quickly by spending heavily on advertising and sales teams, but if it costs more to acquire a customer than that customer will ever generate in profit, the growth is destroying value rather than creating it. That's why customer acquisition cost is almost always analyzed together with customer lifetime value. A healthy business generates lifetime value well above what it spent to acquire the customer in the first place, while a business where the two numbers are close, or where acquisition cost exceeds lifetime value, is buying growth it can't actually afford.

Customer acquisition cost is used most heavily to evaluate subscription businesses, software companies, and consumer apps, where the cost of winning a customer is paid upfront and the revenue is collected gradually over time. Rising acquisition cost over time can signal that a company's cheaper channels are saturated and it's having to spend more to find each additional customer, a warning sign for how sustainable current growth rates really are.