Measuring CAC is necessary when running a BtoC or BtoB (SME) business.
Why is it so important? CAC is one of the main KPIs to analyze when scaling up. It’s useful to A/B Test different acquisition channels or to segment your customers.
CAC is computed as sales & marketing expenses divided by the number of new customers over a certain period of time (known specifically as blended CAC).
Different sorts of CAC can be measured:
- Direct CAC includes all costs directly allocable to customers, such as marketing & commercial expenses and wages, their related operating costs, and dedicated capex … this computation can analyze different sales strategies;
- Full CAC: here you need to add overhead expenses to direct costs. LTV has to be compared with full CAC;
- Indirect CAC includes implicit costs like free trial periods or discounted setup fees. This metric is more useful when comparing different business models.
Don’t just compute a blended CAC. Be aware of your CAC per acquisition channel and ideally per customer. Once you have that, you will save cost and time — as you will be able to know which are your easiest customers to acquire (size, activity, etc.) and which channel is the best (AdWords, FB, offline marketing).
There is some concerns when computing CAC:
- A16z introduced in a post the idea of Paid CAC, which is total acquisition cost divided by new customers acquired through paid marketing. Paid CAC thus excludes new subscribers reached through referral or expansion in your customers account. This KPI is more likely to show your ability to scale.
- Another concern relates to potential cut-off issues — marketing expenses over a certain period of time can lead to subscriptions on the next ones.
If your startup solicits big companies, CAC is not always relevant. In this case, the KPI to follow is sales cycle duration and how it’s evolving over time (your first customers are normally difficult to acquire, but with good references, it should become easier to get the following ones).
Take care of your CAC, keep it under control and analyze any swing !