Customer acquisition cost, or CAC, has reached buzzword status amongst early-stage and venture-backed startups, as their ability to efficiently acquire new customers is often the key to receiving more funding and driving exponential growth. CAC isn’t just for startups, however. In fact, it may even be more important for mid-market organizations to obsess over tracking their CAC.
Before diving into the importance of tracking CAC in the mid-market, let’s do a crash course on calculating CAC.
In its simplest form, CAC is calculated by dividing the sales and marketing costs incurred to acquire your customers by the total number of customers acquired. The actual inputs may vary from company to company, but at a minimum, the costs should include direct labor and any direct marketing and advertising spend, such as your Google AdWords budget.
Unlike startups that need to fanatically track CAC in order to appease investors and drive growth, middle market organizations typically don’t systematically obsess over their CAC. Mid-market firms usually neglect to track their CAC for one (or many) of the following reasons:
Simply put, most mid-market companies don’t track CAC because they feel they don’t need to. These organizations are generally stable and “customer-funded,” and focus primarily on product and service delivery and fulfillment, and less on client acquisition.
Understanding the importance of CAC and knowing how to track it is just the beginning. Next, you must work toward achieving an acceptable CAC. The definition of an acceptable customer acquisition cost might vary from organization to organization, but typically a CAC that is equal to or less than 20% of the average lifetime value (LTV) of a customer is deemed acceptable. This means that if the average annual value of your customer is $20,000, and the average customer stays for three years, then your average lifetime value is $60,000. In this example, you should be willing to pay up to $12,000 to acquire a customer. Now, this is a very simple example but it should demonstrate the fundamentals required to begin working toward an acceptable CAC if you’re a mid-market organization.
Note: startups and early-stage tech companies may track this a little differently. In the startup world, the lifetime value (LTV) to CAC ratio tends to be the driving metric, with most companies aiming to get to a 3:1 ratio. Once startups sustainably achieve this desired ratio they’ll pour resources into their demand generation programs to drive growth and earn market share.
Since mid-market businesses have already established themselves in their market space and tend to focus more on profitability and cash flow, a LTV:CAC ratio of 5:1 is more desirable.
As you may have guessed, the first step to seeing if your mid-market company is acquiring customers at an ideal cost is to identify your current CAC. But what if you measure it and discover the result is worse than 20%? What are the next steps?
In almost every case where the marketing and sales investment is not achieving a desirable CAC, it’s an issue with goal and KPI alignment between marketing and sales. Beyond that, there are often inefficiencies in the way those teams are working, such as:
In order to rectify those inefficiencies and get working toward a desirable CAC, leadership must get buy-in from all stakeholders (ie. marketing and sales) and create an environment with clear transparency into sales and marketing production. This can be especially difficult with experienced (a.k.a. expensive) sales and marketing assets that may be underperforming, but without a transparent view into what your investment is returning you’ll have trouble optimizing CAC. Another requirement for improving CAC is a diligent and consistent analysis of marketing spend. Often, middle-market firms don’t look at their marketing spend critically enough. This is especially true when events and tradeshows make up a large portion of the marketing budget. Event spend can be substantial, and tying it back to revenue is often challenging, even with good systems infrastructure in place.
Sometimes, it can be difficult to allocate company leaderships’ time from core business operations and customer service to focus on analyzing and improving CAC. That’s when it’s necessary to bring in an outside, unbiased team of experts for a critical perspective.
Click below to request a consultation if you’d like to learn more about customer acquisition cost, and how your business can start tracking and optimizing CAC.