Count the cost: customer acquisition cost (CAC)
Put simply, your CAC is the fundamental measure of the health of your business. If your CAC is too high, then there might be something wrong either with the way you are selling and marketing, or with what you’re selling and marketing to begin with.
Either way, you need to find out. Very few businesses will survive for long if they are spending an unusually high amount on customer acquisition.
We’ve got a handy explainer on the basics below, as well as some thoughts on how you can break the numbers down further to get a more sophisticated look at your costs. This might help you explore new customer acquisition approaches or just give you a better idea of your expenditures. It will also probably serve you well with potential investors, if that’s something you’re looking at.
Calculate your customer acquisition cost
Here’s how you calculate your CAC:
The amount of money spent on your entire sales and marketing operation (in a given time period)
/ divided by
The number of new customers converted or acquired in that time period
You’re spending $3,000 per quarter in total on acquiring new customers.
Each quarter you are acquiring 60 new customers.
3,000 / 60 = $50 Customer Acquisition Cost
Now, depending on what revenue your customers are bringing in over that time period, this may be a very good or a very bad number. Making a judgement on this is about looking at what value each customer, or the average customer, brings to your business over time.
HubSpot has a handy explainer for how you can make a start by measuring your CAC up against industry averages, as well as ways to look at what value those customers bring, such as a “customer’s lifetime value” (LTV). A general rule of thumb for SaaS startups, for instance, is that a healthy CAC is around ⅓ of LTV.
That was pretty basic. It can easily get more complicated, though. And there are lots of reasons to take another look at your CAC and try to get a better view of what’s happening.
How to interpret your CAC
Maybe you’re pretty happy with your CAC but still think your analysis could be more sophisticated. Or maybe you’re worried it’s too high and want to get a clearer picture of what’s going on. Maybe you want to shift some of your resources elsewhere and want to be sure you can do that without losing revenue or you want to attract investors. For all those situations, you might want to consider breaking down your expenditure into more detail and looking at some of your indirect costs.
For instance, what about external consultants? Have you out-sourced any of your marketing? Are you including the salaries of copywriters, designers, and developers in your CAC even though a lot of their time is spent on the product? Software is also an area that you might want to look at. Perhaps your CRM is much more sophisticated than you need or maybe you don’t have the best deal and should look at your options.
It might not always seem worth your time to break your costs down into such detail but it could be a major help in improving your customer acquisition process. And it probably will matter to potential investors, if that’s an avenue you’re looking at.
A key thing to mention when considering your CAC is time. How early in your growth as a company are you? How worried do you need to be about your CAC right now? And how much of your expenditure is the upfront cost of something that will serve you well in the long-term?
On the other side of things, how much of your expenditure is on staff or software that you don’t really need yet? Have you expanded too quickly? It might be painful but, if you’re going to trim costs to make a course-correct, you need to know exactly where you stand.
How to use what you know
When you’ve crunched the numbers like this you might also see opportunities for growth. It might be that one of your marketing channels is much more successful than the others and it’s worth diverting some funds from an under-performing channel.
Or you might realize that your CAC is actually pretty low and you can afford to increase your spending to make sure you aren’t missing out on even more prospects. You could hire a new salesperson, invest in some new software, or try some different approaches you haven’t had the freedom to look at previously.
You might also want to consider making this analysis a regular thing. Whether that’s on a monthly or quarterly basis; a quick look at the spreadsheets or a standing dashboard; on a managerial or executive level is all up to you.
People say “information is power”. But it’s understanding that information gives you that power and the more data you have, the more likely you are to understand it.