Wow, this week has been insane. Last week–and early this week–the market was
Customer acquisition cost (CAC) is the total cost of acquiring a new customer for your business. It’s a simple mathematical equation that takes:
The total amount spent on sales and marketing, divided by the total number of customers acquired.
The total amount spent on sales and marketing should include costs such as: salaries and expenses for your marketing department; the cost of your sales people; pure advertising costs like cost per click; and other costs associated with sales and marketing.
But before we dive deeper into CAC, let's talk about why we should care about this metric.
CAC is very important, simply because: If your customer acquisition cost is higher than your business revenue, you'll go out of business.
Pretty important, right?!
Growing a SaaS Company
Helping your company grow is a very important business activity. It's obvious, but without customer growth, your business will not be in business for very long.
However, if you chase growth at any cost, you're looking at the same outcome.
The key is to find that sweet, middle spot... the spot where your business is growing, but you're not outspending your revenue, or the money in your bank account.
Scaling Your Company Growth
If you want to scale and grow your business in a profitable way, you need to look at more than just your CAC. Lifetime value of your customer (LTV), and the payback period are also very important metrics.
In other words, if you spend one dollar to acquire a customer, how long will it take for that customer to pay back your dollar, and produce more. LTV is basically the revenue you get from a customer over some time period.
The reason LTV is important is because it dictates how quickly you can reinvest the cash back into your business. LTV should be a component of how you measure customer acquisition costs.
LTV is difficult to understand for young companies simply because they don't have any historical data to review. But, it's critical to start tracking as soon as you can.
An acquisition channel is any method for producing new customers for your business. This could be Facebook Ads, Google Ads, print advertising, etc.
There are a myriad of acquisition channels, and the most difficult part is finding the channel that works best for your business.
Twitter could be a great channel for you. Or, maybe finding an influencer on Instagram is the best route. The point is, you need to do the legwork and figure it out (without spending all the money in your bank account).
When your business is smaller, it's easier to compute your true costs because you are using a smaller number of channels. But, as your business grows, you will have more channels and more ways customers will engage with your business. That's where creating direct response marketing campaigns is critical.
Direct Marketing Metrics
I'm a huge proponent of direct marketing. At its core, direct marketing is targeting an acquisition channel, then providing a method for a direct response from the customer.
An example would be a pay per click ad that sends the customer to a specific landing page, with a specific metric you are trying to capture: free trial sign-up, download a white paper, watch a video or webinar, et cetera.
Direct response ties the marketing activity with the desired outcome. This is where you can get very specific and better gauge CAC.
Marketing Channel Metrics
After you have set up your direct response campaigns, you can really begin to determine the profitability of your advertising.
For example: What is the profitability of Google advertising vs. Facebook advertising? Are big companies more profitable than small companies?
It's important to experiment with different marketing channels. Some will have a low CAC, while others will be very expensive.
My goal is to find channels that will help acquire customers with a fast pay back period. To do this correctly, you need to use costs and lifetime customer value to optimize your marketing programs.
At the end of the day, CAC / LTV helps answer the question: Will the customers we're driving and acquiring create more revenue than they cost?