Why a Low Customer Acquisition Cost (CAC) Isn’t Always a Good Benchmark

January 5, 2021

Customer Acquisition Cost (CAC) is a key SaaS metric that accounts for how much it costs your company to procure each new customer. The received wisdom is that reducing your CAC is one of the best ways to increase your company’s profitability and likelihood of success.

However, this metric calls for discerning judgment. What it tells you about your company will depend on your goals, your business model and needs, and your customer lifecycle. There is no single answer to the question of whether — and by how much — to reduce CAC.

What is CAC?

CAC includes things related directly to bringing customers in the door — like marketing campaigns, sales outreach, and onboarding processes — as well as more indirect expenses like company headcount and resource costs.

The CAC metric is calculated by tallying all of the spendings directly and indirectly dedicated to acquiring customers in a given period, then dividing that by the number of customers you acquired in that period.

Should you focus on lowering CAC?

Generally speaking, having a lower CAC than your competitors is a good thing. The less it costs you to bring a customer in the door, the better.

However, as with many things in life, you get what you pay for. So it’s important not to become obsessed with lowering that cost at the expense of the quality of your marketing, sales, and onboarding processes. Accordingly, your goal should be to improve the cost structure and scalability of your business. This means cutting out any CAC expenses that are not necessary, but stopping before you handicap the essential functions that you need to grow.It’s also important to look at your CAC in the context of the rest of your business, particularly how long the customers you acquire stay with you. Low CAC may not look so good if you also have low retention rates. Spending small amounts on acquiring customers that leave you quickly is not much better than spending large amounts on customers that stick around. In both cases, your spending may well be too high relative to how much you’re getting back from your customers over time (also known as customer lifetime value, or CLTV).

Can high CAC be okay?

There are times when you may even want to increase your CAC. If your CAC and your CLTV are both low, you may need to spend more on sales and marketing to attract better-fitting clients whom you can retain longer and get more revenue from over time.

Only you can make such judgments for your business after you analyze your numbers and see how they trend over time. Your decision may depend on your goals for your company.

A high CAC may work for you if you want to promote stability and predictability in your company’s revenue and are not as interested in scaling quickly. This strategy is good for those who want to grow their business slowly over time without major equity investment or a flashy exit.

Can you lower CAC without sacrificing quality?

If you know you need to lower your CAC but want to make sure to do so without impairing your ability to bring in good-fit, high-CLTV clients, one good option is to niche down.

Developing a product for a highly defined target audience can make it easier to find and attract customers who need what you are offering and can be acquired with relatively little expense. Such customers are also more likely to stay with you over the long term since they’re apt to find high value in the specialized product you’re selling.

Niching down is a strategy that will set you up for sustained, steady growth. You may have to sacrifice a chance at generating the explosive growth equity investors look for. But you’ll be able to more accurately identify and attract the customers who are right for your business, which will improve your CAC, your CLTV, and thus your company’s health and profitability.

Regardless of whether you focus on a niche or sell to a general audience, however, judging your CAC in the context of your entire business and the market you’re selling to is essential.

This blog was authored by Lighter Capital. Republished with permission.