How much does it cost you to acquire a customer?
That’s your CAC (Customer Acquisition Cost). Relatively self-explanatory. If you’re reading this, you probably already knew that. The better questions, then, are these:
- How do I accurately calculate CAC?
- How do I reduce CAC?
These, especially the latter, are likely what you’re curious to learn. If you’re running—or working at—a startup that’d like to reduce its CAC (read: all startups), then this is for you. Below, we’ll cover novel tactics you might want to consider if you’re looking to reduce your CAC.
How to properly calculate your CAC (and avoid common mistakes)
On its own, CAC is a good metric. But it’s significantly more useful alongside another metric, called payback period. Because while CAC will tell you how much you spend to acquire a customer, payback period will tell you how long it takes for that investment to pay off.
Here are simple calculations for both:
- CAC = Marketing & sales expenses / number of customers acquired
- Payback period = CAC / average monthly revenue per customer
Simple enough, right? It usually is. But calculating CAC can be tricky, particularly depending on what you want the CAC for. Here’s a short checklist that’ll make sure you avoid making mistakes:
- Calculate CAC by channel. Your total overall CAC can be helpful in cases, but for making performance marketing decisions, you really need to know how well each specific marketing channel is performing—so that you can, for example, compare Google PPC to Facebook Ads.
- Include labor cost in some of your calculations. Sometimes, CAC might seem wonderful… Until you realize you’re paying $20k per month in labor to achieve that CAC, and then it’s not quite so impressive. For example, if you’re spending $5k per month on Google PPC but paying someone $10k per month full-time to run it, chances are you’re not very efficient.
- Compare similar segments. If you’re marketing to different audience segments on different channels, comparing CAC directly is an apples-to-oranges exercise. Whenever you’re comparing CAC as a part of your decision-making process, consider the types of customers you’re getting from each channel. Make comparisons as parallel as possible.
Three novel tactics to reduce your CAC
Google “how to reduce CAC” and you’ll get a lot of articles with vague tactics. Here, we want to zero in on a few novel—and maybe counter-intuitive—tactics that we’ve seen startups use to reduce their CAC and accelerate growth.
1: Learn how to run performance marketing campaigns on your own
Imagine you’re a seed-stage startup. You’ve got about a year and a half of runway, and you want to run some ads. Your budget is $10k per month.
In cases like these, it’s not uncommon for startups to hire people full-time. It’s often assumed you need a full-time person to run all your paid media. But, with a budget like $10k (or even bigger, at times), you’re going to nearly double your CAC by way of labor cost.
Instead, get scrappy: consider learning how to set up & run paid media campaigns on your own.
Shahed Khan, co-founder of Loom, recommends using Twitter & LinkedIn to find subject matter experts. Then, pay them for a couple hours of their time to teach you their best insights. If you’re looking to cut CAC, consider this to avoid paying $8-10k+ per month on someone to run paid media.
And if you want to take it a step further:
- Pay a subject matter expert on paid marketing
- Learn how to run campaigns yourself
- Create an SOP of your process
- Pass it on to a contractor who can run your campaigns for a whole lot cheaper
Too often, startups get the corporate tendency to outsource everything; to hire full-time roles for everything they need done. But if you're looking to stay lean and reduce CAC, get into the weeds and learn things on your own. From there, you’ll be able to make better hiring decisions—and potentially avoid shelling out an expensive full-time salary.
2: Change the way you charge for your product
If you’re spending too much to convert customers, there’s a chance the problem lies with your pricing strategy, not with your paid media (though it may be both).
One thing we often notice? Inflexible, flat-rate billing often deters companies from converting. Especially if those companies are sensitive about budget—which many, these days, are. You’re reading this piece on the Octane website: we help startups implement usage-based billing. So while we’ve certainly got some skin in the game here, we also have plenty of experience to back it up.
Here’s exactly how rethinking your pricing strategy might help reduce CAC:
- There’s significantly less sign-up friction. Instead of committing to a massive contract for something they’re not yet sure they love, usage-based billing lets customers pay for what they use. There are fewer obstacles to sign-up, which (in our experience) tends to improve startups’ conversion rates—and, thus, lowers CAC.
- You can get more creative with acquisition. For one, usage-based billing often means you’ll have a wider group of potential customers to market to, especially on the lower-end. For example, Mailchimp relied on a usage-based, self-serve offering to become the default email marketing platform for small to medium-sized businesses. With a more traditional pricing strategy, this would’ve been more difficult to pull off.
- You’ve got more flexibility for maximizing revenue. Implementing usage-based billing means that, as you collect data from your customers, you can come up with creative ways to maximize revenue based on how people actually use your platform.
3: Focus all your effort into a single channel
Per Julian Shapiro, who led growth at Webflow and Clearbit, most startups that make it to Series B get there with a “hero channel” — one growth channel that accounts for the vast majority of their acquisition. Problem is, many startups don’t realize this until it’s too late.
Take a look at your current marketing efforts. Are they fractured, scattered across a dozen channels with high CAC costs across the board? If this is the case, try to find your hero channel and spend your time & effort on getting that channel to be as efficient as possible.
A good starting place is to look at your current CAC by channel, pick the ones with the lowest numbers, and use the ICE framework (impact, confidence, ease) to decide which channel you want to invest in.
Want to implement usage-based pricing? Octane makes it easy
If the second insight on the list above sounded interesting, you may want to check out Octane. We make it easy for startups to implement usage-based billing by eliminating the months-long engineering slog it usually takes to get it going.
Because, truth is, your engineering team should probably (and would rather) work on the core competency of your product. Chat with us to implement usage-based pricing in just a few clicks. No engineering resources required.