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Budget Customer Acquisition

Budget Customer Acquisition

Know exactly what you can spend to acquire a customer and stay profitable.

Last updated on July 31, 2025

Budget Customer Acquisition

Know exactly what you can spend to acquire a customer and stay profitable.

What this recipe is for

Setting disciplined acquisition spend limits so you grow customer volume without sacrificing margin or burning cash.

What you’ll get

  • A clear maximum cost to acquire a customer (CAC) that preserves profitability
  • Channel-level spend targets tied to return expectations
  • A repeatable test framework for new acquisition tactics
  • Early signals when acquisition becomes unprofitable

Key inputs

  • Customer Lifetime Value (LTV) or expected revenue per customer
  • Gross margin percentage
  • Current CAC by channel
  • Conversion rates in the funnel (traffic → lead → customer)
  • Retention/repurchase assumptions (to project LTV)
  • Payback period goal (how fast you need to recover CAC)

Core logic

To scale sustainably, acquisition must pay back: aim for LTV : CAC ≥ 3 : 1. That means you should earn at least three times what you spend to get a customer, after accounting for margin and expected repeat. Acquisition spend is “budgeted” by backing into the maximum CAC that keeps that ratio healthy given your current economics.

Step-by-step actions

Step 1: Calculate baseline LTV

Estimate how much a customer spends over their expected lifespan, adjusted by gross margin:

LTV = Average Revenue per Customer × Repeat Frequency × Gross Margin %

Step 2: Determine your target CAC ceiling

Back into allowable CAC:

Target CAC = LTV / 3

This gives the maximum you can spend to acquire a customer while preserving the 3:1 efficiency guardrail.

Step 3: Assess current CAC by channel

Break down what you’re spending per new customer from each source. Compare each to the target CAC.

Step 4: Prioritize channels & test

  • Double down on channels where actual CAC ≤ target CAC and volume can scale.
  • Rapidly test new channels with small spends, measuring their CAC against the ceiling.
  • For borderline channels, experiment with improving funnel conversion before increasing spend.

Step 5: Define payback expectations

Set how many days/weeks/months it should take to recover CAC (shorter payback improves cash flow). Adjust acquisition aggressiveness based on cash availability.

Step 6: Monitor and adjust

Weekly: track LTV updates, CAC per channel, and the LTV:CAC ratio. If the ratio drops below 3:1, pause scaling and diagnose the leak (e.g., falling retention or rising acquisition costs).

Decision thresholds / guardrails

  • LTV : CAC < 3 : 1 → Stop increasing acquisition spend; fix retention, increase LTV, or reduce CAC before scaling.
  • Payback period exceeds acceptable window (e.g., 6 months) → Reevaluate aggressiveness—shorten the acquisition cycle or improve conversion.
  • CAC drift upward without better customer quality → Audit channel performance; reduce or re-optimize spend.
  • New channel test shows CAC > target → Either improve funnel efficiency before scaling or drop the channel.

Examples

  • Local service business:

      • LTV = $2,000 (average client value over repeat engagements) × 50% gross margin = $1,000 contribution.

      Target CAC = $1,000 / 3 ≈ $333.

      If Facebook ads are costing $400 per new client, optimize the funnel or shift to a lower-CAC source.

  • Subscription product:

      • Avg monthly revenue $100, average lifespan 6 months → Revenue per customer $600.

      Gross margin 60% → LTV = $360.

      Target CAC = $360 / 3 = $120.

      Test acquisition ads with small budgets; scale only channels delivering new customers at ≤ $120.

Thinking checks

  • Is each channel’s CAC below the target ceiling before scaling?
  • Are we tracking actual payback time and does it align with cash constraints?
  • If acquisition cost rises, do we have other levers (frequency, AOV) to compensate?
  • Are new customers behaving as expected (retention, upsell) to justify their acquisition cost?

If the answer is no…

  • LTV too low → Improve retention, increase AOV, or raise price.
  • CAC too high → Tighten targeting, improve funnel conversion, or shift channels.
  • Payback too long → Shorten acquisition cycle or reduce upfront spend.

What to track (minimum)

  • LTV (updated with real behavior)
  • CAC by channel
  • LTV : CAC ratio
  • Payback period
  • Conversion rates at each funnel stage
  • Retention impact on LTV

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