Not all business metrics are created equally. CAC, or customer acquisition cost, refers specifically to how much money you need to spend in order to acquire new customers and expand your client base. You need to know, and fully understand, your company’s CAC because the idea of any business is to grow its customer base and continue to make a profit. This, friends, is not done by simply closing your eyes and shooting your shot. Early-stage investors will ask you about your CAC because your answers will give them insight on the profitability of your company or idea.
This metric is important to early stage investors when determining the scalability of your company. This number will shed a bit of light on how profitable your company has the potential to be. Investors don’t want false promises, they want to see how the numbers align before dropping the big bucks. What’s your current relationship with your clients, and is there room to grow?
The million-dollar question is:
How much money can be made off of a customer, and how much does it cost to make aforementioned money. Is there profit to be had?
COST OF SALES + MARKETING / NUMBER OF NEW CUSTOMERS = CAC
Here’s an example: You spend $100 on customized advertising targeting your ideal audience, and at the end of this campaign, you’ve gained 10 new clients. Your CAC in this case is $10.
Give the people what they want: if your product is constantly adding value to your customers’ lives, this shouldn’t be a problem. Keep your finger on the pulse of your audience through customer feedback. Make sure you’re occasionally fixing a problem they have, offering a complimentary product or service, or a new feature. These are the types of incentives that encourage customers to stay with you longer, and consistently choose you over your competitors.
Word of mouth through customer referral program: Are you more likely to download an app your best friend raves about, or an app you came to know after reading a couple reviews from strangers (and the occasional troll) on Google? Word of mouth is a wonderful tool to bring new eyes to your company, and a referral program could be just what the doctor ordered! If this warm lead converts, the CAC would be $0, and that, boys and girls, is a number we can get onboard with.
Don’t ignore CRM, or customer relationship management: When you see your customers as more than metrics, it shows. It fosters brand loyalty and repeat customers. In the same vein of adding value, you can implement a newsletter, have an active blog or create loyalty programs.
Congrats! You’ve made it to level two. Just kidding, there’s no level system. Being an entrepreneur is a sisyphean task reserved for dreamers, geniuses and masochists, am I right?
Once you have a better grasp on your business’s scalability, the next metric you should look at is LTV, or customer lifetime value. This is especially key for subscription services, but it’s a solid metric to understand for any startup.
The question here is how much money a customer will generate during your relationship together. The longer they’re with you, the more they will spend, ideally, right? But also, this is a key indicator to determine how much you’re willing to spend on a customer.
When thinking about subscription services, you want to make sure that your customers are not cancelling left and right, and that they are in it for the long haul. Netflix is a great example of this.
The average Netlifx customer stays on with them for about 25 months, and their average LTV is $291.25
As a Netflix subscriber, you will spend about $139.80 if you pay $11.65 per month during a 12-month period. Now it’s time for the brains over at Netflix to sit down and decide how much overhead they’re willing to risk on each customer.
If they spend $160, it may seem like they’re losing money, but in the long-term, they will in fact make a profit. It’s lifetime customer value, not how-much-revenue-can-I-make-by-tomorrow value.
You’re playing a calculated game of chicken, right? Don’t let the fear of losing money in the short run keep you from making your money back, plus more!
Here you have yet another reason to keep your customers happy, feeling listened to, and engaged!