Navigating the Complexities of Customer Acquisition Cost

You know that feeling when you’re looking over your books and suddenly you realize you don’t?actually?know how to calculate your customer acquisition cost (CAC)? Yeah, we’ve been there too. And as it turns out, there is no one-size-fits-all formula to use.?

Understanding key performance metrics to measure success is crucial. So we looked to our?10th House?members and industry experts to weigh in on how they’ve calculated it, how investors view it, and what factors they include in their formulas.?

Back to the basics. What is CAC??

Customer acquisition cost, also known as CAC, is the amount of money you spend to get a new customer. While it might sound simple enough, there are a ton of factors that go into calculating it in a way that makes sense for?your?business. This metric provides valuable insights into the effectiveness of your marketing and sales efforts. Being aware of the investment required to acquire new customers allows you to make greater informed decisions regarding resource allocation, growth forecasting, and marketing efficiency

So how do most leaders calculate Customer Acquisition Cost?

Generally, CAC is calculated by dividing marketing cost by the number of new customers.? Carli Roth , Head of Community at the Female Founder Collective, delves into varying ways to calculate the?cost?variable “The total sales and marketing costs include all expenses related to sales and marketing efforts, such as advertising, salaries, and benefits of the sales and marketing team, commission, events, and other related expenses”.?

CAC = (Total Sales and Marketing Costs) / (Number of New Customers Acquired)??

Mira Katz , an advisor for creative entrepreneurs, takes that even further by sharing that it depends on four factors including your “financial model,?your marketing strategies, your growth strategies, and your industry”. So, how do you know what factors are important for you to put into consideration??It depends on what you’re trying to show.?

How is CAC being used internally vs for investors?

Alexandra Canedo , the founder of HQalchemy.com, has seen CAC used directionally by brands as a way to point founders in the right direction and make more informed decisions when it comes to the success of their marketing efforts. Her experience with startups has shown that by using a simple version of the calculation, brands are able to quickly change the formula based on the information they are looking for.?

But when it comes to investors? Alex shares that they like to see consistency in how the formula is being calculated and advises to not mess with the inputs unless there’s a good reason to do so. As investor and CEO? Alison Koplar Wyatt ?puts it, “As long as you’re consistent in what you include in CAC versus what you don’t include, then you should be good.”?

Consistency is also key for investors as they often use the KPI as a way to quickly identify if the number is too high and where there’s an opportunity to cut costs.?

So in short, don’t fret if your CAC differs from other companies in your industry. Focus on setting up a standard level of practice for calculating costs that best represent?your?company's efforts. Doing so will allow you to create accurate growth projections and optimizations toward your business strategies.?