Measuring avg. Customer Acquisition Costs (CAC) with clarity and confidence is really hard when you are starting your SaaS business.
Here are the most common CAC mistakes that SaaS startup founders make before they hit $1M ARR:
1) Not understanding what CAC is.
CAC is the average cost it takes to acquire a new customer. That’s all your sales and marketing expenses from last month divided by the number of new customers from last month.
CAC maps directly to the Sales and Marketing expense line in your income statement.
2) Just counting marginal marketing and sales expense.
“We have zero CAC because we don’t do paid ads.” Nope. Nice try.
CAC includes all the time the founder spent selling, plus any marketing staff or contractors, sales commissions or affiliate fees, the rent for the sales office, flights to the trade show, and even product expenses that drive new sales. all of it.
3) Saying you’ll sell equally to small biz, mid-market, and enterprise customers.
I know you “could” sell either of those, but each one of them has a different customer acquisition engine. You just can’t do all three of them at once and build an efficient growth model when you start.
Trying to execute three different CACs and business models before $5M ARR either shows you don’t know which will work best yet or you have never scaled up a company from a startup.
4) Not understanding that efficient customer acquisition is your business.
You are actually in the business of repeatedly acquiring happy customers with LTV (Long Term customer Value) that is at least 5x your CAC.
LTV to CAC is pretty much all later-stage investors care about since it’s about your revenue growth machine.
5) High LTV to CAC means you can grow without funding.
Yes, if you can spend $100 CAC to get $1000 LTV (10x+), you will be profitable and can grow without outside funding. Or you can skip a round.
I wish more founders would be as fanatic about getting high LTV/CAC (above 10) as they are about raising big funding.
6) Professional SaaS investors are CAC and LTV experts now.
They want to see your numbers, dig into cohorts, do their own math, and talk to current and churned customers.
Your growth is a function of CAC and LTV math, not about how many lines of software code you have.
7) High LTV/CAC means you have a great, sticky product and you are saying no to bad-fit customers.
You might have efficient marketing and effective sales, but scalable CAC is just as much about your amazing product and happy customer referrals as your marketing tactics.
8) Assuming that CAC in year 1 looks anything like CAC in year 5.
Founders almost always underestimate how much sales and marketing costs they will have at scale. And how marginal CAC increases as you get bigger.
It’s just really important to get your customer acquisition factory started early and learn what works and what doesn’t. CAC is the core growth metric.
What other CAC mistakes did I miss?