Customer Acquisition Cost (CAC)

There are a lot of acronyms in growth marketing. CAC, LTV, ROI, SEM, SEO. We’ll tackle one of the important acronyms in this blog post: CAC.

Customer acquisition cost is the amount of money that you spend on sales and marketing to acquire a customer and the actual customers that you gain. In a formula, it shows up like this:

Why is CAC important for startups? 

Customer Acquisition Cost is important for Startups for several reasons such as resource allocation, financial planning, business model validation, scalability and investor confidence. Of the list two stand out in particular: 

Business model validation: 

Low CAC means that the startup business addresses a market demand. As a startup founder, you have found a way to woo customers in the most cost-effective way possible using the right channels. 

The other reason is investor confidence: 

Investors closely monitor CAC as it indicates the efficiency of a startup's marketing and sales strategies. A lower CAC relative to customer lifetime value (CLV) demonstrates a healthy and sustainable business model, which can instill confidence in investors and attract additional funding.

What can impact CAC?

Making the CAC low is definitely a goal of a startup company/service. It’s easier said than done. These are  some factors that may make it challenging. 

• The Target audience: Specifically, who they are and their needs. This may be a B2B company or a B2C or B2B2C. More specific audiences require tailored marketing which will impact acquisition costs. 

• Competitive Landscape: More competition and more choices available to the target audience, higher the cost. Not only will you have to advertise more frequently, your advertising costs may be driven up by the demand. 

• Product or Service Complexity: The complexity of the product requires additional marketing efforts to educate customers.

• Marketing Channels: The choice of marketing channels may impact the overall cost including the marketing mix. Part of the puzzle behind CAC is knowing what channels to choose to acquire customers: Social media, PR, paid advertising, SEO, trade shows, sales outreach etc. Each has cost implications. 

• Brand Awareness: Do customers know your brand name? The level of brand recognition and awareness affects CAC. Established brands with strong reputations may have lower acquisition costs compared to newer entrants or brands with less recognition.

• Purchase Frequency: The frequency of purchase of a product. Some items are bought regularly because of wear and tear while others are only purchased every few years. Knowing the frequency of product purchase including seasonality of purchase will help with lower CAC. 

What is the average CAC by industry?

  First Page Sage has calculated the CAC by industry. See the table below. 

You will see that the organic CAC is lower than inorganic, or in other words, paid CAC.

The CAC calculations are industry benchmarks only and your costs may be higher/lower depending on the channels that you use.

Source: https://firstpagesage.com/reports/average-customer-acquisition-cost-cac-by-industry-b2b-edition-fc/

What is a good CAC?

What is a CAC that you should aim for? Well, it’s not just about the amount of money that you spend on acquiring your customers but it’s also based on the customers’ Lifetime Value (LTV). It’s based on the total value that the customer brings to the business throughout the relationship.

A good CAC should be 3:1 or 4:1 ratio. Meaning the CAC should be a third or a quarter of the value of the customer. The revenue you generate from a customer should exceed the cost you incur to acquire them. And it should certainly not be the other way around.

Final thoughts

Always keep control over your CAC. You should work with someone who can work with you to test media channels and targeting to keep the costs low. 

For more information on CAC, please visit the-startupideation.com