Customer Acquisition Cost (CAC)vsUnit Economics

CAC is the total cost of convincing a potential customer to buy your product. This includes all marketing spend, sales team salaries, tools, and overhead directly tied to acquiring new customers. The formula: CAC = Total Sales & Marketing Spend ÷ New Customers Acquired. A company spending $50K/month on marketing and sales and acquiring 100 customers has a $500 CAC. CAC varies dramatically by channel — paid ads might be $300 CAC while organic content is $30. VCs obsess over CAC because it determines unit economics: if CAC exceeds LTV, every customer you acquire destroys value.

Unit economics is the direct revenue and costs associated with a single 'unit' of your business model (usually one customer). If your unit economics are positive, every new customer generates profit. If negative, every new customer accelerates your death. The core calculation: Unit Profit = (LTV × Gross Margin) − CAC. If LTV is $2,000, gross margin is 80%, and CAC is $1,200, unit profit is ($2,000 × 0.80) − $1,200 = $400 per customer. This means each customer eventually contributes $400 toward covering fixed costs and generating profit.

The most dangerous mistake is calculating 'blended CAC' by averaging all channels together. This hides the fact that your Google Ads channel might have a $200 CAC while organic has a $5 CAC. Blended CAC at $100 looks fine — but if you scale by doubling ad spend, CAC doesn't stay at $100; it approaches $200 because you're scaling the expensive channel. Always track CAC per channel. The second trap: excluding sales salaries from CAC. If you have 4 sales reps at $10K/month each and they close 40 deals/month, that's $1,000 in 'hidden' CAC per customer on top of marketing spend.

Founders often achieve 'positive unit economics' by excluding fixed costs entirely or misclassifying variable costs. True unit economics must include a fair allocation of all variable costs. The second trap: assuming unit economics stay constant as you scale. They can improve (economies of scale in hosting, support) or worsen (higher CAC from market saturation, more support tickets from less-sophisticated users). Track unit economics by cohort and by scale.

Calculate CAC by channel: Paid CAC, Organic CAC, Referral CAC, Outbound CAC. For each: total spend on that channel ÷ customers from that channel. Kill channels where CAC > LTV/3 (not LTV/1 — you need margin for overhead). Track CAC trend monthly — increasing CAC often means market saturation or competitive pressure and requires immediate investigation.

Calculate profit per unit: (LTV × Gross Margin) − CAC. If this number is negative, do NOT scale. Fix your pricing, reduce CAC, or improve retention first. Scaling negative unit economics is like pouring gasoline on a fire — you burn faster. Once positive, track the 'contribution margin ratio': Unit Profit ÷ Revenue per Customer. This tells you what percentage of each revenue dollar covers fixed costs.