Performance MarketingvsCustomer Acquisition Cost (CAC)

Performance marketing is a comprehensive term for online marketing and advertising programs where advertisers pay only when a specific action occurs. These actions include a generated lead, a sale, a click, and more. Unlike traditional advertising (like TV or print) where you pay for 'impressions' regardless of results, performance marketing is highly measurable and optimized entirely around ROI (Return on Investment).

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.

The most common trap is 'Attribution Illusion.' Platforms like Meta and Google intentionally take credit for as many sales as possible, even if the user was going to buy anyway. If you blindly trust the platforms' dashboards without independent tracking, you will overspend wildly on campaigns that actually have zero incremental impact.

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.

Implement strict 'incrementality testing'. Turn off a specific ad channel in a specific geographic region for 30 days and watch your total sales volume. If your ad platform claimed it was generating 50 sales a month in that region, but turning it off only drops your total business sales by 5, those ads were not incremental—you were paying for sales you already had.

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.