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LOW: Cost to Acquire a Customer (CAC) In its simplest form, CAC is all the costs associated with landing new customers (e.g., marketing, advertising, sales) divided by the number of customers you acquired during that period. It’s sometimes tricky to calculate because getting a handle on your marketing costs can be tricky. If you’re focusing on SEO, you may be creating all the content yourself rather than paying a writer. You may be getting a lot of your early customers from forums you spend time on or by getting in front of other people’s audiences. In those cases, the cost is your time rather than an easy-to-calculate number. It’s a lot simpler to calculate CAC if you’re running ads. Then, you can see how much you’re paying per click and track how many people convert from each source. But if you’re not in that position, valuing your time at a certain rate (e.g., $150 an hour) and taking your best guess at time and money spent on marketing in a given month can get you to a good enough estimate of your CAC. How do you know if your CAC is too high? By calculating how long it’ll take to pay back the costs of acquiring each customer. As I was first getting into recurring revenue, I thought that if I was getting $1,000 in LTV from each customer, I could spend $700 to acquire every customer and make $300 a pop. Right? The problem is that you’re not getting $1,000 every time you sign a new customer. With a $50-a-month contract, you’re getting that $1,000 over the course of the next year and a half. If you spend $700 per new customer in January, you won’t break even on those customer acquisition costs until next February (assuming the customer doesn’t churn). With venture capital, the rule of thumb is that you should spend no more than one-third of your customer’s LTV or no more than one ACV. As bootstrappers, we don’t have enough cash to wait 12 months to recoup CAC from every customer. Most successful bootstrappers I know are in the two- to six-month payback period (depending on how much cash they have in the bank). There are times when that number can get more aggressive. For example, at our peak with Drip, we could afford to spend more on customer acquisition because we had the cash in the bank and I knew the numbers in the rest of our funnel by heart. Even at our peak, though, we were only running seven or eight months out—that’s the high end for bootstrapped companies.
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Rob Walling (The SaaS Playbook: Build a Multimillion-Dollar Startup Without Venture Capital)