Customer Acquisition Cost (CAC) in Startup
CAC stands for Customer Acquisition Cost.
Customer acquisition costs (CAC) might mean the difference between efficient growth and startup disaster unless you have an infinite budget and resources.
Your CAC reflects the effectiveness of your sales and marketing activities, the efficiency with which you acquire new clients, and even whether or not you have product/market fit.
Needless to say, if you want your startup to flourish in the long run, you must learn how to track, analyze, and optimize your CAC.
We’ll go over all you need to know about customer acquisition costs in this article so your business not only grows, but thrives.
What is the cost of acquiring a customer?
The client Acquisition Cost (CAC) is the amount of money spent in sales and marketing to attract a single new client.
Trying to identify the “sweet spot” is a challenge for many entrepreneurs.
Spend too much on client acquisition and you won’t be able to recoup your investment, let alone generate a profit. If you spend too little, your company’s growth potential may be limited.
In general, you want to maintain your CAC within budget while meeting your customer growth targets!
Customer Acquisition Cost and Customer Lifetime Value
CAC is a useful statistic on its own. However, in order to give context, you must compare it to your client lifetime value (LTV).
LTV is the average amount of money a customer pays you before discontinuing service. For example, if you run a SaaS business and your average customer pays you $1,000 over the life of their subscription before canceling, your LTV is $1,000.
If the average cost of acquiring those clients is less than $1,000, you’re in good shape. However, if acquiring clients costs you $1,500, you have a serious problem.
Your LTV:CAC ratio is the link between your LTV and CAC.
Profitwell and Chargify, for example, both agree that the best LTV:CAC ratio is 3:1. For example, if your LTV is $1,000, you should aim for a CAC of $333 or less.
How to Determine Customer Acquisition Costs
To determine your customer acquisition cost, divide your sales and marketing expenses for a specific time period by the number of clients you acquired during that time period.
The CAC Formula
Sales and marketing expenses totaled / number of new clients obtained
Here’s an illustration.
If you spent $5,000 on sales and marketing in the previous three months and gained two new clients, your CAC is $2,500.
A recurrent question among entrepreneurs is which sales and marketing expenses should be included in the cost of customer acquisition.
Essentially, any expenditures associated with acquiring new clients over the time period specified should be included.
Here’s a list of some of the most frequent marketing and sales expenses to account for in CAC:
Marketing material design (ad designs, landing sites, etc.)
Salaries for sales and marketing employees
Spending on advertising
Tools for sales and marketing (CRM, reporting, etc.)
Anything else incurred in the course of sales and marketing
Calculating CAC is much easier if you track your spending with a tool like Quickbooks or Xero.
To take things a step further, you can import that data into Finmark to see how your CAC fits into your entire financial forecast (Xero connection will be available soon).
dashboard for client acquisition costs
Finmark was used to create this!
We recommend tracking your CAC as early in the life of your startup as possible. You can see whether new marketing methods, team expansion, and other changes have a beneficial or negative impact as you begin to try them.
What is the significance of CAC?
You’re probably beginning to understand why CAC is such an important statistic. However, there are several reasons why you should regularly monitor your customer acquisition expenditures.
Discover the Most Effective Marketing Channels
If you spend money on marketing, especially through sponsored channels like social media ads, Google Ads, and media buying, you should keep CAC in mind.
Instead of only tracking your CAC overall, you should also track your acquisition expenses by marketing channel.
Assume you’re executing ad campaigns across numerous platforms, such as this:
Channel Ad Spend Number of CustomersCAC
Facebook Ads $1000 x 5 = $200
Google Ads $1000 ten $100
Newsletter Advertisement $2000 15 $133
The email ad brought you the most customers overall, but it cost you twice as much as the other two channels combined.
According to the figures, Google Ads appears to be the most efficient use of your marketing funds, so you know where to focus your efforts.
When deciding where to spend your marketing efforts, CAC is an excellent indicator of which marketing channels produce the best outcomes.
Improve Your Sales and Marketing
Similarly, your CAC might help you optimize your sales and marketing activities.
Remember that the CAC calculation accounts for all of your marketing and sales expenses. So, if your LTV:CAC ratio begins to resemble 1:3 rather than 3:1, you know there’s a problem somewhere.
The issue could be that a particular marketing channel is underperforming, your sales staff is underperforming, or any number of other factors. Use CAC to discover faults or chances for optimization by indicating how efficiently you’re spending your sales and marketing efforts.
Determine Your CAC Payback Period
When you spend money to attract new clients, the goal is to recoup your investment and then more. Your CAC payback period indicates how many months it will take to return your investment.
The longer your CAC payback period, the more difficult it is to scale your startup.
Let’s take a quick look at how it works with a single consumer.
Assume you spent $250 to obtain a customer who pays you $25 every month. You need that consumer to stay with you for at least 10 months before they pay back the money you spent to get them.
If the consumer leaves within 10 months, you’ve effectively lost money.
Imagine instead that it only cost you $100 to obtain that same consumer. The money would be returned to you in four months.
It’s a significantly faster path to profitability and long-term growth.
But it all begins with understanding your CAC.
What Is an Appropriate CAC Benchmark?
A few CAC benchmark reports are available online. However, the numbers vary so widely that it’s difficult to compare your own company to the data.
For example, one study found that most industries have an average CAC of more than $100, but it does not take into account company size, product pricing, or other aspects.
standards for customer acquisition costs
Customer acquisition cost is affected by your industry, target audience, pricing, and other factors. This makes benchmarking against other organizations extremely tough.
You can instead utilize yourself as a standard. As long as your LTV:CAC ratio is favorable, your startup is likely to succeed.
How to Cut the Cost of Customer Acquisition
As previously stated, the goal is to reduce CAC while reaching growth expectations. But how precisely do you go about doing that?
Here are a few suggestions.
- Constantly experiment with new marketing channels
Do you simply accept the first contractor quotation when you need work done on your home? Or do you shop around for the best deal?
Hopefully, it will be the latter. Otherwise, you may be paying too much.
Marketing is comparable. If you only use one or two marketing channels, you won’t know if there are other, more efficient ways to obtain clients.
It’s usually a good idea to test the waters and try out multiple channels to discover one gets you the best bang for your cash. Just remember to take CAC measurements for each channel.
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- Enhance Your Funnel
A poor funnel can significantly increase your customer acquisition costs. Two firms can sell items that are virtually comparable, but if one has a better marketing and sales funnel than the other, they will attract consumers for less money.
Consider the following example of two companies selling a comparable product. They both used the identical sales and marketing funnel procedure and spent $1,000 to get 100 leads.
Take note of the drop-off rates after each stage.
Business A (Number of Leads Remaining)Business B (Number of Leads Left)
100 percent live demonstration
60-80-day free trial
Customer pays 20 50
Business A loses 40% of their leads after the first stage, and another 66% following the trial stage, as shown. As a result, they end up having 20 paying customers for the $1,000 they spent, resulting in a CAC of $50.
Business B, on the other hand, keeps more consumers through each step and acquired 50 customers with a $20 CAC.
That is the power of a good funnel, and how it can significantly boost your CAC.
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- Make use of retargeting
Because you’re presenting ads to people who have already visited your website, retargeting is one of the best strategies to lower your CAC.
This suggests they’re already familiar with your brand and aren’t as “cold” as someone who hasn’t heard of you before.
One of the most prominent examples of this is when someone visits your website after reading an article on Google. You can then retarget them using Facebook, Google, or another ad channel. According to studies, retargeted visitors are 43-70% more likely to convert than cold leads.
What Exactly Is Retargeting?
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- Invest in Sales Education
“Won’t spending money on sales training add to my acquisition costs?” you may wonder.
Yes, in the short term. However, if the training is effective and your sales team is able to convert consumers more efficiently, your CAC will decrease over time.
According to Accenture data, for every dollar invested in sales training, a company receives $4.53 in return. Spend the money today to enjoy the long-term benefits.
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Control Your Customer Acquisition Costs
Every dollar counts in the world of startups. Understanding CAC allows you to invest the appropriate amount of money in marketing and sales rather than dumping all of your hard-earned fundraising dollars down the toilet.
The appropriate sales and marketing plan may make or destroy your business, and knowing your CAC will put you up for long-term success.
This content is provided “as is,” with no intention of providing tax, legal, or financial advice. If you have any questions, please contact your advisor.