The Customer Acquisition Cost (CAC)
Once you’ve reached around $1 MM in ARR (annual recurring revenue) and want to accelerate your growth. Then you need to think about how to scale your marketing team. But many companies are scared to do this. Because adding the salaries of new marketers into your budget can cause your customer acquisition cost (CAC) to skyrocket.
The strength of the marketing team in a growing company is invaluable. Every marketing strategy shapes the way customers will perceive and eventually interact with your product. But the salaries of team members who work to acquire customers are a huge factor in your customer acquisition cost. This is why new marketing hires can be a hit to your customer of acquisition cost (CAC) metrics. You need to reconcile the cost of scaling in order to make this investment in your company’s future.
Hot to calculate the Customer Acquisition Cost
Customer Acquisition Cost (CAC) is the total cost of sales and marketing efforts that are needed to acquire a customer. It is one of the defining factors in whether your company has a viable business model that can yield profits by keeping acquisition costs low as you scale. Managing these new costs is all about maintaining balance, optimizing efficiency, and scaling up customer lifetime value so you can get the maximum return on this investment in your company. You can’t make smart business decisions if you don’t know the full unit cost of each customer. Calculating CAC is theoretically straightforward
= divide the total expenses to acquire customers in a certain time period by the number of customers acquired during that period.
But the miscalculations—and the fatal underestimations—of CAC happen when you don’t account for all expenses to acquire customers. As you scale, the salaries of your marketing team members become prominent components of your CAC that you cannot forget to include. If you don’t account for team members in your CAC, you won’t really know how much it costs to acquire each customer and you won’t be able to determine how to earn back those expenses.
Simply put, the CAC formula is as follows:
CAC = (total cost of sales and marketing) / (# of customers acquired)
if you spend $36,000 to acquire 1000 customers, your CAC is $36.
CAC = ($36,000 spent) / (1000 customers) = $36 per customer
This increase shouldn’t prevent you from scaling, because with a larger team you have more power to generate revenue. If your new hires own some of these processes and metrics, you can leverage the power of their addition to improve the quality of your marketing and, ultimately, increase your revenue.
Putting it in another way:
– you’ll spend $50,000 on an individual marketing team member’s annual salary, that’s an additional $4,166/month in total expenses to acquire customers.
– Hypothetically your other costs might total $11,000/month ($1,000 in paid advertising + $10,000 in marketing tools and software). Adding $4,166/month increases monthly CAC by over 37%.
– Adding two new marketers at that salary means over 75% increase in your monthly CAC, given these other monthly expenses.
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