Do you know how much it costs to acquire a customer? In my experience this is one key metric that a lot of business owners have overlooked. As the SaaS business model gained in popularity so did the attention on this key metric. Like many metrics, “CAC” becomes more meaningful when used in comparison and these three tips are going to help you up your financial game.
1. The simplest way to calculate CAC is to divide the total sum of your sales and marketing expenses and divide it by the number of new customers acquired in the same period. By tracking it over a 3 month trailing period you’ll get a better sense of whether your costs are declining which is generally what you are striving for. Your accounting software can make this easier if you have the sales and marketing expenses grouped on your Profit and Loss statement as a single department.
2. Once you know your CAC, you can’t really adjudicate if it is good or bad on it’s own. Avoid making premature conclusions other than to have a realistic appreciation of how much cash it takes to realistically add customers. The cost of an online click is only one tiny aspect of customer acquisition costs and new business owners generally underestimate how much cash is required to attract and attain customers. If you are putting the finishing touches on your budget, make sure you also confirm what your planned CAC is so you’ll be able to compare your results to see how you are performing to plan.
3. If you really want to maximize the meaning from CAC, you’ll want to compare it to LTV. The lifetime value of a customer is the amount of gross profit you can expect to earn over the lifetime of each customer relationship. An LTV/CAC of 3 or greater indicates you are building a successful business. This means you’ll earn 3 times more money from this customer than you invested to acquire them. One word of warning is to also keep an eye on the payback period so that you are ensuring you aren’t waiting too long to recover CAC. In SaaS, you’ll want to recover that CAC in 12 months or less, and in other business models it’s much sooner.
CAC and other business metrics can easily be calculated each month with the support of a part-time virtual Controller. Investing in professional support may seem expensive in the short-term but it pays off in the end.