Cost of Acquiring Customers
Understanding the cost of acquiring a user/customer is essential to understanding the unit economics of a venture and building a successful business. This data offers a better understanding of which demographics are the most profitable and how efficient the sales engine in the business is.
As the name suggests, this metric is intended to include all of the costs in acquiring a user/customer. It can be challenging to accurately portray CAC in a single metric when there are multiple target markets (e.g. SMB & enterprise) or sales strategies (e.g. paid marketing & organic acquisitions) for an organization.
In addressing CAC for multiple target markets, it is important to look at each demographic separately. It is especially important to view the market segments individually because the cost to acquire an SMB client is going to be very different than an Enterprise client. The sales cycles for each segment are going to have different approaches and length of time. Trying to look at these in a combined metric is most likely going to inflate SMB cost above where it should be and present the Enterprise CAC better than it actually is. For this reason, we need to complete individual studies to understand each segment.
Calculating CAC takes time and effort but can be crucial data in understanding the viability of the venture. This stand alone metric provides insight but is a powerful piece of data when used in different ratios. That will be further discussed in a later post.
As an example the calculations for blended and paid CAC can be seen below:
Total Acquisition Costs / Total Amount of New Customers
Total Acquisition Cost / New Customers Acquired by Paid Marketing
Companies often overly focus on top line growth at all costs but analyzing the unit economics and associated CAC spend provide insight into the scalability of the business.