How to measure CAC in a two-sided marketplace

A framework for thinking about CAC and how it impacts unit economics for your B2B or B2C marketplace startup

Natalie Luu
May 6 · 4 min read

Building a marketplace can be a daunting task — you need to start from scratch building two different customer bases, simultaneously.

Previously, we introduced the Lightspeed standardized eCommerce model, but after many conversations with marketplace companies about how they measure CAC, there wasn’t a standard for how CAC was represented. This is especially true in two-sided marketplaces when there are significant costs in acquiring both suppliers and buyers. So, we created our own methodology for analyzing CAC of a two-sided marketplace.

What marketplace founders should understand is that the costs to acquire a user (purchaser) should take into account both buyer and seller CAC, since the presence of sellers attracts buyers and vice versa. By excluding the costs of acquiring sellers in user CAC, the result is an understated value. We find that calculating Two-Sided CAC for a user is helpful for marketplaces that pay to acquire both buyers and sellers, and when there is a meaningful ratio of sellers to buyers.

At Lightspeed, we solved the problem for ourselves by calculating Two-Sided CAC that accounts for the costs of acquiring both buyers and sellers. We wanted to share this with the broader community because this is key to deeply understanding unit economics and user LTV/CAC for a marketplace.

The formula for calculating Two-Sided CAC:

Fully-burdened user CAC for a marketplace.

In the example of ezCater, the leading marketplace connecting caterers with hungry businesses in which we recently announced leading a $150M growth round, we examined CAC for users acquired through both the ezCater marketplace and ezOrder platform. ezOrder is a white-label ordering platform for caterers to embed on their website, which attracts users organically for ezCater. Due to the organic user funnel of ezOrder, buyer CAC = $0. However, seller CAC > $0 so the resulting Two-Sided CAC > $0.

To derive our equation for Two-Sided CAC, we took into account both networks contributing to gross revenue. Analogous to how we would value a company by including the costs of both equity and debt in Weighted Average Cost of Capital, we calculate CAC for a two-sided market including the acquisition costs of both buyers and sellers.

Here’s an example of calculating Two-Sided CAC for BoutiqueCo, a fictitious boutique marketplace:

  1. Last quarter, BoutiqueCo spent $1 million on social media marketing to consumers. They acquired 50,000 buying customers who transacted on BoutiqueCo at least once, so Buyer CAC = $1,000,000 / 50,000 = $20.
  2. BoutiqueCo spent $500,000 on guerilla marketing last quarter at trade shows to attract sellers of boutique products and acquired 1,000 sellers on to the marketplace. Therefore, Seller CAC = $500,000 / 1,000 = $500.
  3. At the end of the quarter, there were 20,000 sellers and 400,000 buyers resulting in a 1:20 ratio of sellers-to-buyers.

→ For a BoutiqueCo consumer, Two-Sided CAC = CAC_Buyer + CAC_Seller per Buyer = $20 + (1/20) * $500 = $20 + $25 = $45.

We find this method of grossing up user CAC to be more accurate when there are significant costs for acquiring a new seller to the marketplace and a significant ratio of sellers to buyers.

A note on measuring unit economics of a two-sided marketplace:

For marketplaces where there is frequent churn of buyers or sellers, there may be ongoing costs to retain users on the platform. If this applies to your startup, try bringing those retention costs above the Gross Profit line. This results in a lower Gross Margin if you have such retention costs (i.e. customer support, customer success, or onboarding) but it is more representative of a “fully-burdened” Gross Margin. Apply the fully-burdened Gross Margin when calculating LTV to get a more accurate view of LTV/CAC for a user.

If you are a founder building a startup around a two-sided market thinking through unit economics and found this framework helpful or have questions, give me a holler at natalie@lsvp.com.

Thank you to my partners Merci, Jeremy, and Alex for reviewing drafts this post.

Natalie Luu

Written by

Investing Partner @LightspeedVP