Master Your Money Mojo: Personal Finance Domain 2 Practice Test 2026 – Elevate Your Financial Future!

Customer acquisition cost (CAC) is fundamentally the total expenses associated with marketing and selling to a new customer. This includes all costs incurred in attracting new customers, such as advertising expenses, sales personnel costs, and promotional offers designed to encourage purchases. Understanding CAC is crucial for businesses as it helps determine the efficiency of their marketing strategies and the overall profitability of their customer base.

For instance, if a company spends a large amount on marketing but does not convert enough leads into paying customers, the CAC will be high, which can indicate inefficiency in their marketing efforts. Ultimately, businesses aim to keep CAC lower than the lifetime value of a customer to ensure long-term profitability.

The other options do not accurately define CAC. Total revenue generated by a customer refers to the lifetime value rather than acquisition costs. Time taken to convert a prospect into a customer deals with sales cycles rather than costs associated with acquiring customers. The average sales price of products does not capture the marketing and operational expenses involved in gaining new clients. These elements are important in their own right, but they do not encompass the concept of CAC.