Customer Acquisition Cost (CAC) - Critical to your Success

In business there is always more to be done than time available. The same hold true in terms of what to measure, there are many, many possible metrics you could measure.

So why is Customer Acquisition Cost (CAC) so important?

For many subscription, SaaS and similar companies a key metric is cost of acquisition of a customer (CAC). This metric is very important for company valuation and capital raising activities, but I suggest it is crucial to measure for all businesses with an appropriate business model as it provides a simple way to measure the overall health of your business.

If, over time your CAC is increasing it is very likely an indication you have underlying issues with your business, offering or team. Complexity of doing business is one such issue.

Managing your business to an ever diminishing CAC will force you and your team to focus on the highest priority activities, namely: 1. Customers 2. Efficiency 3. Productivity 4. Performance

What is CAC? Customer Acquisition Cost (CAC) is the cost, or resource consumption, an organisation must expend to acquire a new customer, on average. Most commonly all sales and marketing expenditures, including salaries of staff for direct sales models, and partner costs for indirect models, which are directly related, or can be attributed to efforts to attract new customers are included.

How to calculate CAC? Whilst each company is different, here are some guidelines to get you started.

CAC = Total Sales & Marketing expenses / # of New Customers

If you collate all of your sales & marketing expenses and divide it by the total number of customers acquired during the desired timeframe (month, quarter, year) you have your CAC.

To illustrate: if you spend $10,000 per month on sales & marketing and acquire 20 new customers during the month, your CAC is $500. Put another way, you've spent $500 to acquire each new customer.

Now you can monitor the health of your customer acquisition efforts and with a little extra effort determine which of your campaigns or marketing initiatives are the most effective.

CAC by itself however is only an indication. To truly understand the viability of your business your customer Life Time Value (LTV) needs to calculated.

Check back in soon for our LTV post, or if you cannot wait, please contact us.