Customer Acquisition Cost (CAC) is defined as the total cost associated with gaining a new customer. It is one of the most important metrics for founders to track. Understanding your CAC and how to properly use it to invest in sales and marketing is critical to growing from Founder Revenue to Scalable Revenue.
What is CAC?
CAC, in simple terms, is the expense incurred to bring in a new customer. It encompasses various costs like marketing campaigns, advertising, and sales efforts. Knowing how much you're spending on acquiring each customer is fundamental.
How to Calculate Customer Acquisition Cost
You can use our CAC Calculator for Founders to identify your CAC. The process is fairly straightforward. You add up all of your sales and marketing costs over a specific period, and divide that by the number of new customers acquired during the same time frame.
The formula: CAC = (Sales and Marketing Costs) / (New Customers Acquired).
Why Founders Should Measure CAC
Surprisingly, many founders don't know their CAC. Not having a clear picture of your Customer Acquisition Costs often leads to missing forecast projections and growth goals. For example, if your growth goal is 20% a year and you don't know how much it costs to acquire a new customer, you may only grow 10% because you didn’t invest enough in sales and marketing.
Here are several other important ways CAC can help scale your business.
Budget Allocation: By knowing your CAC, you can allocate your budget wisely. It helps in optimizing your spending on different channels to acquire customers cost-effectively.
Scaling Strategy: CAC is indispensable when scaling your business. If your CAC is lower than the revenue generated from new customers, it's a green light to grow.
Identifying Inefficiencies: High CAC can be a warning sign. It indicates that you might need to refine your marketing or sales strategies to make them more efficient and cost-effective.
Profitability: CAC directly impacts profitability. Lower CAC means higher profits per customer, which is a goal every founder should strive for.
M&A / Investor Appeal: Investors often look at CAC when considering funding. A low CAC demonstrates efficient use of resources, making your business more attractive to potential investors.
Focus on New Customer Growth: By methodically tracking and reporting your new customer adds each month, you focus on a key performance indicator. As the saying goes, what gets measured gets monitored. It’s critical to rally your organization around a common metric that indicates growth for your business.
Customer Acquisition Cost is a crucial metric for all founders to track. By understanding your CAC, you can make informed decisions that drive your company's growth and success. At FounderScale, we understand that as a founder, your primary goal is to drive your business towards optimal growth and efficiency. Achieving scalable revenue is the key to success, but it's a complex journey that requires strategic guidance and expertise. That's where our Fractional Chief Revenue Officer (CRO) services come in.
A Fractional CRO is a strategic ally dedicated to helping founder-led companies like yours move from Founder Revenue to Scalable Revenue. They possess the knowledge, skills, and experience of a full-time CRO but offer a more flexible and cost-effective solution. Contact us today to learn more.