Hey 👋🏼 Chris here…

Happy Monday to the thousands of motivated marketing professionals, startup founders, and business owners who are a part of this community.

Today we're going to tackle how to effectively measure Customer Acquisition Cost (CAC). So many marketers get this wrong. Let's take a look at the philosophy behind this efficiency metric and how to calculate it properly.

Today’s issue takes around 3 minutes to read. As always, if you have any feedback or questions I would love to hear. Feel free to reply to this email.

Enjoy!

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How to Calculate CAC

The formula for CAC is this:
CAC = (total cost of sales and marketing) / (# of customers acquired)

Aside from being a funny sounding acronym CAC is a very important KPI for our marketing strategy. 

If we know how much we're spending to acquire customers then we can make informed decisions about how aggressive to be with our budgets and also where to direct investments in channels.

Early in my career as a Director of Marketing at a SaaS startup I missed out on tremendous growth opportunities because I didn't know the philosophy behind this metric.

✅ Using a LTV:CAC ratio of 3:1 

An "efficient" CAC means your Lifetime Value of a single customer is 3x what it costs to acquire them. 

While this is the gold standard to know the efficiency of your marketing spend it also can be somewhat misleading. 

• LTV is often difficult to measure
• We don't have clarity on channel attribution
• Payback periods are over 6-12 months
• 3:1 is too conservative for the growth rate the company needs to hit

Use this 3:1 as an industry benchmark and not a hard rule. Ideally we are working closely with finance/exec team to determine how aggressive to get with budget.

✅ Use Channel & GLOBAL CAC 

It is more and more challenging to measure directly attributable acquisition for our marketing channels. 

So use a Global CAC too.

GLOBAL CAC = ALL MARKETING SPEND / ALL ACQUISITION

CHANNEL CAC = MARKETING SPEND by CHANNEL / CHANNEL ACQUISITION

The user journey is changing. Potential customers are hearing about our products and services in groups, communities, comment sections, and from social influencers.  

This makes it unreasonable for us to use a Channel CAC in isolation.

✅ Measure Channel CAC Correctly

Here's an example breakdown of the costs associated with various channels.

Keep in Mind...

These calculations are not meant to be an exact science. 

We should know that acquisition is rarely able to be attributed to a single marketing channel.  

The idea here is to understand:

• How our budgets are being allocated
• The general confidence we have in that channel's contribution to acquisition
  
  

✅ Don't Look at CAC in a Silo

We can also use supporting efficiency metrics like:

• Payback Period
  
• Return on Ad Spend (ROAS)
• Revenue per Employee

These metrics combined with CAC will help us strategically align with the exec team and the board. 

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That's it! If you like this kind of content please reply to this email and let me know.

Have a great week 🙌🏼

Chris

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