What does customer acquisition cost (CAC) measure?

Customer acquisition cost (CAC) is specifically designed to measure the total cost incurred to acquire a new customer. This metric encompasses all expenses related to the process of attracting and converting new customers, including marketing and advertising expenditures, sales team expenses, and any other costs directly associated with the efforts to gain new clientele.

Understanding CAC is vital for businesses as it helps in assessing the efficiency of marketing and sales strategies. By analyzing this cost in relation to the lifetime value (LTV) of a customer, companies can determine whether their methods of acquiring customers are sustainable and profitable. This direct correlation plays a crucial role in financial planning and strategy, allowing businesses to allocate resources more effectively and optimize their marketing efforts.

In contrast to the other options, they do not represent the precise calculation of CAC. Total sales revenue from new customers focuses on income rather than costs, average revenue per transaction pertains to income per sale, and total number of customers served has no relevance to the cost associated with acquiring them. Thus, the focus on costs associated with gaining new customers makes the second option the correct interpretation of what CAC measures.