Delving into CAC

In today's time, acquiring customers have become both expensive & challenging leaving decision-makers with numerous questions such as:

📍Are the customer acquisition spends justified, what is the limit, when should we cut our loses?

📍How to measure the efficiency & effectiveness of customer acquisition efforts?

📍 How to optimize spending & improve the return on investment?

One of the metrics which can help decision makers answer these questions is Customer Acquisition Cost (CAC).

👉 It is the cost incurred by a company to acquire a PAYING CUSTOMER. Simply, CAC is the total cost of Sales & Marketing divided by the total number of new customers acquired over the measurement period.

👉For businesses, CAC plays a central role in aligning all departments towards a common goal of efficient growth.

It helps:

📍Sales team evaluate the effectiveness of their strategies, tools & processes

📍Marketing team determine which channels & tactics generate better results

📍Finance team make informed budget allocations.

📍Management make informed decisions about capital deployment, fundraising, and financial planning.

Further, in the early-stage startups, CAC & CAC payback help management in forecasting cashflows & liquidity while also managing cash burn and runway.

👉For investors, the importance of CAC varies depending on the stage of investment.

📍During the seed funding round, investors are more interested in the potential of the startup’s idea and the caliber of the team.

📍However, as the startup progresses to further rounds of fund raise, CAC becomes increasingly important as investors want that the business acquires customers in a cost-effective manner & has a clear path to profitability.

👉Understanding CAC, may result in more than what meets the eye.

📍An industry’s CAC is not one-size-fits-all. Customizing CAC benchmarks to align with a particular company's strategy & stage of business operations is crucial, eg- Lakme India’s CAC may not be the correct benchmark for that of Amway’s.

📍When CAC increases overtime, it serves as a warning signal. It is expected to reduce overtime due to continuous improvements in lead quality, conversions, and an increase in organic traffic.

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