Customer Acquisition Cost. It’s become a ubiquitous metric, seemingly for good reason:
- it demonstrates to investors how you are performing vs. industry peers
- it shows you how your own current performance compares to how you were doing last month, last quarter, or last year
- it helps you spot risks to sales and cash, so you can change course accordingly
- it’s a key metric that drives dynamic forecast models, telling you how much you can grow revenue with your budgeted sales & marketing spend
Or so they say….
The Consequences of a Cracked CAC
For many, the fact of the matter is that CAC has become a confusing number in a board deck that:
- at best, checks the box for monthly performance reporting materials and then gets ignored
- at other times, can spread panic without clear solutions
- at worst, incorrectly paints a positive picture that drives your team to invest time and money into the wrong activities.
In other words, a misleading CAC might leave you walking towards fire, completely unaware; or even tell you to run faster straight towards the flames.
This key metric can slip through the cracks for a number of reasons, from innocent mistakes to intentional misdirection. Let’s cover a few of the common ways that the CAC calculation gets distorted, so you can correctly use this metric to support sound financial decisions and drive healthy, long-term growth.
Nothing Up My Sleeve…
If you entrust your KPI reporting to any party outside of your finance team – particularly if they deliver the same service they are accounting for- you run a high risk of misleading figures.
At a high level, your revenue teams (whether internal employees or 3rd party agencies) may choose to focus on different KPI’s from month to month, much like a CEO on an earnings call will highlight the most positive aspects of the quarter’s performance and gloss over the red ink. That’s great if you’re trying to raise morale, but it’s a poor way to guide your corporate decision-making.
Honest Self-Reporting: Only One Piece of the Assessment Puzzle
Even when you’ve structured revenue team performance dashboards to minimize such apples-to-oranges monthly reporting output, having them self-measure these benchmarks is just like a doctor asking their patient to give themselves their own physical. Even if that patient has the discipline to get themselves on a scale, they are missing the other medical tools, lab support services, and (most importantly) the years of professional training to give themselves a complete exam.
This is something we often see with our clients. For example, performance marketers often speak about RoAS (Return on Ad Spend) interchangeably with CAC, and omit the cost of delivering digital advertising. In other words, an agency partner often excludes their own fees – which tend to include both a fixed fee and percentage of ad spend- when presenting figures on the “return” on your marketing investments. This isn’t necessarily nefarious; it’s just industry standard for marketing professionals, and their primary focus day-to-day.
Plus, standalone RoAS is an important benchmark metric that’s worth tracking (much like weighing yourself at home can be a useful personal health metric that’s easy to track on a regular basis). However, it does not give you the full financial picture needed to accurately forecast spend and correctly align strategy to financial goals.
A Fully-Baked CAC
This brings us to an important principle of performance analysis. A “fully baked” CAC means more than just your most obvious advertising expenses. When you’re fishing for new customers, all expenses that help get them in the boat are an acquisition cost. In other words, it’s not just the cost of the bait & tackle for the day – you need to include the crew, the fuel, the fishing nets, and even the boat itself!
Such additional Sales & Marketing expenses can include: referral fees, commissions, S&M team salaries, conference fees & travel, contractors (photographers, blog writers, SEO optimizers) and software systems (Salesforce or Hubspot CRM, Mailchimp, Klaviyo, LinkedIn – just to name a few).
This additional CAC view helps you to better understand what you’re truly spending to reach each new customer, so you can better estimate how much capital you need (and where) to continue to hit your growth targets.
Unfortunately, even with the best intentions, siloed information can make it hard (impossible) for Sales & Marketing teams to paint the full picture of their own ROI, as much of these necessary financial data points are not readily available to them – or even strictly confidential. To ensure CAC reporting with less bias and more complete information, CEOs will often turn it over to their finance team. Making sure you have team resources owning this analysis is a critical first step to capitalizing on this metric (pun intended).
Time Period Oversight
Beyond making sure all costs are considered, assigning activity to the appropriate time period is a crucial and often challenging analysis decision. This requires strategic, intentional thought, as well as the capacity to execute the analysis month after month. But if you are going to bother tracking CAC at all, you should structure its measurement around your own unique sales processes and timelines.
For example, if your digital sales funnel takes four months from click to contract, simply dividing last month’s ad spend by last month’s new customer count will be a terrible measure of your true CAC. While you don’t want an overly complicated process, you should build an ROI analysis model that estimates what it actually cost to get the customers you added this month, taking your timeline into account.
The Upshot
If you’ve taken the time to read about properly measuring customer acquisition cost, you already know how important this figure is to your business. A misrepresented CAC can ripple throughout your entire decision-making system. Trusting this and any other KPI in its entirety to revenue teams, particularly if that party benefits from a rosier figure, is a dangerous practice. Just as dangerous is developing an in-house measurement system without devoting the strategic financial expertise or consideration it deserves.
A strategic FP&A Advisor will ensure that you are tracking “true” CAC, so you can improve revenue team accountability, better align budgeting and hiring decisions, and feel more empowered in your conversations with investors.
