Why Cost of Customer Acquisition is the most important startup metric ?
The cost of customer acquisition (CAC) means the price you pay to acquire new customers. In its simplest form it can be worked out by: dividing the total cost associated with acquisition by total new customers, within a specific time period.
Monthly Cost to Acquire Customers = Monthly Customer Acquisition Costs / New Customers
What the CAC Metric Means to You
The cost of customer acquisition (CAC) is important for both companies and investors. Investors use the cost of customer acquisition to analyze the scalability of a new sass technology. They can determine a company’s profitability by looking at the difference between how much money can be extracted from customers and the costs to extract it.
Investors view internet-based companies through the same lens. The are concerned with the current relationship, not on feature promises of improving the metric.
The business model viability, in the majority of startups, will come down to balancing two variables:
- Cost to Acquire Customers (CAC)
- The ability to monetize those customers, or lifetime value (LTV).
Successful SaaS businesses have long understood these metrics.
We are always over optimistic
To be an entrepreneur requires great optimism, and belief in how much customers will love your product. Unfortunately this same attribute can also lead entrepreneurs to believe that customers will beat the path to their door to purchase the product. This sometimes causes them to grossly underestimate the cost it will take to acquire customers.
To start the customer acquisition engine requires a series of steps like SEO, SEM, PR, social marketing, direct sales, channel sales, etc.
Innovative ways to get customers
Many companies realized the importance of lowering the cost of acquiring customers, they innovated the way they acquire new customers with the techniques described below:
- Extensive use of their website to drive lead flow. In particular, using inbound marketing to build traffic.
- Offering free products and services to attract web visitors.
- Use of a free trial.
- Leveraging the power of social networks for viral growth.
- Use of touch-less conversion to convert trials to paying customers.
If you are planning your next startup, you can’t afford to ignore the cost of customer acquisition.Once you have proven the business model, hit the accelerator pedal, and invest as much as you can afford before the competition realizes what you have done.