In an ideal world, your startup’s product or service would be so wow-worthy that people would be falling over themselves to buy it. And you might have some cases of that. But it’s no way to build a business. If it was, sales and marketing departments wouldn’t exist.
In reality, businesses need to position themselves attractively and encourage potential customers (i.e., leads) to make the purchase decision. The bad news? Those efforts often aren’t free.
The good news, though, is that if you track your customer acquisition costs (CAC), you can hone in on areas where you’re getting the best returns for the least investment. You can see what’s not working, too, to eliminate it and free up more resources for more effective sales and marketing efforts. But before we get into how to optimize your CAC, though, let’s get a good overview of these costs laid down.
CAC is actually pretty simple. It’s the amount of money your company spends to acquire any given customer. It’s the resources you invest to convert a lead into someone who purchases your product or service.
Paid CAC is the cost per customer acquired through paid marketing channels (total sales and marketing spend in a given month/total customers acquired via paid channels, including via sales, in a given month)
In your seed stage, you might have few enough customers that you can track CAC on an individual basis. But most companies would get buried under that amount of work. You’ll reach a point — and probably pretty quickly — where it’s much more effective to categorize customers (by the marketing channel, for example). Then, within each category, you total up your spend and divide it by the number of customers you’ve gained to find the cost of acquisition per customer.
Say you spend $1,000 on Google Ads and gain 500 customers. Your CAC would be $2 ($1,000 / 500 = $2).
While enterprise-level companies often segment CAC by specific channels, this might be more detailed than your startup needs for now. In fact, a lot of startups add up all of their marketing and sales spend over a specific period (e.g., a month), then divide it by the total number of customers acquired in that period.
This doesn’t just mean what you pay for promotional materials and marketing channels. Your CAC calculations need to also include the salaries, commissions, bonuses, and overhead associated with your sales and marketing teams.
Organic vs. paid CAC
It’s important to distinguish between paid and organic CAC. When most people talk about CAC, there’s an assumption that all customer acquisitions require spending on your company’s part. But as we touched on at the top of this article, there are situations where you can land customers without paying anything. This is called organic CAC. Some channels for organic CAC include:
- Referrals and recommendations from existing customers
- A high ranking on a search engine result page (SERP) that puts you in front of a customer looking for your specific product or service
- Community adoption (e.g., a certain group of people choose your startup and endorse it for others in their group)
To some extent, organic CAC is out of your hands. It requires people to find your website naturally or love your product/service so much that they recommend it to their network. But your company can take steps to strengthen its opportunities for organic CAC. Specifically, that means making a great product or delivering a great service.
To that end, your startup benefits from identifying customers that come to you organically each month. If your organic CAC grows, it’s a sign that people like what you’re putting out. But if it dips, it indicates that people aren’t overly impressed with what you’re offering to the market. You need to reevaluate your product/service and figure out what’s preventing people from recommending your company and choosing you over your competitors.
How to lower your CAC
The more you can reduce CAC, the more of your gross profit you can turn into net profit. Reducing CAC looks different at different business types, but there are some general best practices all companies can employ.
To lower your CAC, explore:
- Ways to improve your lead conversion rate. You shouldn’t be employing sales and marketing tactics in a vacuum. Track what you’re doing and what kind of results it delivers. That could mean using Google Analytics to see how your blogs are performing or your ecommerce tool to identify how frequently people abandon products in their shopping cart. Make it part of your sales and marketing team’s job to show ROI on their spend so you can not just see CAC, but also identify areas where you can lower it. Analyzing your lead conversion rate can also illuminate what’s not working so you can ax it. This brings down your sales and marketing spend to lower your CAC.
- Gathering customer feedback. Consider sending out a survey or giving customers an opportunity to review their purchases. This gives you a direct way to pick their brains to see what part of your sales and marketing efforts worked. You might think they found you through a Google Ad, for example, but learn through a survey that they actually sought you out online because they saw something about your company on social media. The more insights you can glean from your customers, the more you can fine-tune your CAC.
- Getting more efficient. Automation and data management are your friends. Things like CRM and marketing automation tools can take a lot of the legwork out of your sales and marketing efforts. And because salaries and benefits for your sales and marketing teams will probably be one of the biggest categories in your CAC, that can go a long way.
Learning to track CAC is the first step. Learning to lower it could be the game-changer that helps your startup thrive. Fortunately, you can get expert help for both. To speak with a team of accountants who specialize in helping tech startups with things like CAC tracking and analysis, contact us at ShayCPA today. We can take the work out of getting started with this highly useful, potentially transformational tool.