Cost per lead divides marketing spend by the number of inquiries. Customer acquisition cost, or CAC, divides the cost of winning customers by the number of customers you actually won. Cost per lead tells you how cheaply you fill the top of the funnel. CAC tells you what growth really costs.

Here's how to calculate customer acquisition cost and cost per lead, with a simple example. You spend $20,000 on ads and get 400 leads. That's $50 per lead (the cost per lead formula is spend divided by leads). If 100 of them become customers, your ad cost per customer is $200. Add $10,000 in people, agency, creative and tech costs that finance agrees belong there, and your full CAC is $300. That's the customer acquisition cost formula: agreed costs divided by new customers won.

All three numbers are true. They just answer different questions. The Journal of Accountancy describes CAC as sales and marketing costs divided by the customers you won, and also covers narrower campaign costs. The point is to agree on what's inside the number before you compare anything. [1]

Why a cheap lead can fool you

At a dental group I worked with, an older lead vendor's cost per lead came down about 30% over ten months. On a cost-per-lead report, that looked like progress. But the treatment each new patient started from those leads fell by about half. The leads got cheaper. The patients they brought in were worth even less.

That's why I never judge a channel on cost per lead alone. I want to see what it costs to win a customer, and what that customer is worth after the cost of serving them. The American Marketing Association's lifetime value guide ties customer value to margin, how often people buy and how long they stay. [2]

What to put in front of the CEO

  1. Cost per lead for the marketing team, to manage media.
  2. Ad cost per customer to see how campaigns turn into customers.
  3. Full CAC, with the cost list written down and agreed with finance.
  4. Profit per customer and payback, so you know whether the CAC is worth paying.

Put a label next to every number. If two departments bring two CAC numbers to the same meeting, they're probably both right and measuring different things. Pull new customers apart from returning ones before you judge any channel.