If you’re starting from 0, the likelihood is: a) you’ll be running a few tests, b) most of your…

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Apr 27, 2016

Let’s say you had a budget of $1,000 to spend on Facebook Ads and they cost you $100 each and you got 5 customers. If you had no other spend in your company to acquire the customers then your CAC is $200 / customer, not $100. That’s because CAC needs to take into account all of your marketing spend to truly understand how much each customer costs you.

Why Misunderstanding Startup Metrics Can Cost You Your Business

Mark Suster

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If you’re starting from 0, the likelihood is: a) you’ll be running a few tests, b) most of your tests will have crap CAC results until you find a channel that works and can scale and c) your testing spend will likely be a much larger proportion of your marketing spend than if you were a larger, established company.

When starting from 0, looking at your overall spend / customers may not tell you much other than the majority of your tests crapped out. Which you knew would happen ex-ante anyway.

So, in my view, if you’re starting from o you set a time period during which you’re testing to find your one or two workhorse channels. You then ignore the CAC for cohorts during this period, because they WILL be crap, even if you hit the jackpot and find a couple of great working channels.

Then you start measuring CAC = (total marketing spend / customers ) for cohorts AFTER you have concluded your tests and have found your workhorse channels.