25 October 2019
There’s one thing that has the potential to kill a tech start-up - the customer acquisition cost (or CAC for short). The CAC is the cost of finding and converting a potential customer into a paying customer. It’s everything a business spends on acquiring them, right up until the point that they convert.
Watch the video here or read on below:
In order to explain why this is important, there is another key metric that tech start-ups need to know about - the lifetime value of a customer. The lifetime value of a customer is quite simply the gross margin (sales minus direct costs) over the whole time that they are a customer.
So, why can this can kill a tech start-up?
If this customer acquisition cost outweighs the lifetime value of the customer, then there is a clear problem. For example, if customers on average have a lifetime value of £100, but it costs £250 to convert a potential customer into an actual customer, then there is a problem because the cost to bring them in exceeds the lifetime value of that customer.
On the flip side, if the lifetime value is £100 per customer and the CAC is just £25, then the business in a good position.
How do you calculate your CAC?
The simplest way to calculate your CAC is to take the total of all of the sales and marketing costs in a certain month and divide it by the number of new customers acquired in that same month.
More complicated calculations can be undertaken, but the time cost verses reward should be considered carefully!
How can we help?
If you would like to know more about key metrics for start-ups or discuss more complex business models, please contact me.
Alternatively, find out more about our tech sector expertise here.
