Google “how to calculate CAC”.
Feel driven with enthusiasm.
Stare at Excel for hours.
The cycle that we all go through as operators.
The Instagram lifestyle and FOMO affect us all–whether we admit it or not. The truth is that every hard problem is hard for a reason. There are no silver bullets.
The lead lead bullet that we call CAC is going to take months to accurately shape. By that time, you may even have to shift your business model and recalculate it. Yay.
Hard Problem #1: Days to Close
(For the purpose of this post, let’s simplify days to close to mean the days between someone finds you and the day they purchase something from you.)
At the most basic level of math, calculations get more challenging as you add more dimensions. For all hard problems, the additional element of time is the ultimate additional dimension.
Days to close is one of the metrics that exacerbates CAC. In most cases, we choose to report weekly and monthly. But how do you report monthly when your days to close is 14 days? That means that any new visitor in the last half of one month will be a customer in the first half of the following month.
Cost in Month 1. Revenue in Month 2.
The easy answer here is cohort analysis. Google Analytics has a cohort report that gives us some context into this. I’ve recorded a quick walkthrough for it.
But do you assign cohorts according to the day, week, or month? Do you create a cohort around when someone first arrives on your site or when they become a lead? Maybe when they perform a specific action on the site? You can see the potential issues.
Hard Problem #2: Attribution Across Channels, Devices, & People
The brilliant Avinash Kaushik has detailed attribution problems in depth.
The crux of the attribution problem is that no decision is linear. Even something as small as choosing what to eat for breakfast each morning has more inputs than we could acknowledge in the next 10 minutes. What did our parents feed us growing up? What did we have a bad reaction to? Does your significant other prefer bagels over eggs? You don’t think about these while you stare into your fridge each morning but they do impact and delay your decisions. How many times have you said, “I’ll worry about it after I get to work”?
The one element that I’ve repeatedly encountered with customers (that Avinash omitted since it wasn’t the purpose of his post) is that people don’t make decisions alone. I’ve learned more about purchasing decisions from this 45 minute interview than just about any other resource. I now look differently at my own buying decisions. Who knew buying a mattress would be so convoluted?
What I would have (as Bob Moesta mentions in the interview) attributed to an impulse purchase, I now understand to be the product of many touch points, channels, devices, and people. Think about how simply you look at your customer lifecycle as a marketer and then compare that with the process Bob unearths. (start about 6 minutes in to skip the intro)
Without the qualitative data, you’ll never generate enough empathy to realize that, while one person ends up pressing the buy button according to your CRM, there are three people Slacking them and one looking over their shoulder holding the company credit card while they do it.
Hard Problem #3: Lifecycle Stages Are Impossible
THAT’S RIGHT I SAID IT.
For most SaaS startups, you’re likely dumbfounded and grateful that so many people are paying you or, more likely, confused why no one will start to pay you.
We’ve all heard about the magic metrics that Facebook and Twitter found and leveraged to achieve growth (and turn people who sign up into active users). In truth, finding those magic metrics is hard. Not only do metrics not jump out at you on their own, you need to have the right tools in place to capture them.
Chamath Palihapitiya has a fantastic talk where he covers those metrics in part. More than 4 years old and it’s still one of the best talks on marketing and growth I’ve ever seen.
What happens when someone uses multiple emails to sign up for multiple free trials? Your leads grew by 5 in your CRM. You can’t close the same person 5x. Factoring in these leads is a little hard.
What happens when they used one email for a free trial and, unknowingly, used another to pay. It looks like you have a 0-day lead to close period and the customer came from a direct link (perhaps radio is “direct” for you) when in fact your Facebook campaigns are killing it. That’s a hard thing.
The point is not to make a list of these situations and build a model that way. The point is to help you understand that vying for perfection will only hurt you. Aim to constantly reduce the guesswork and assumptions over time. It’s not quite 80/20, but you can probably use best practices to properly attribute 60% of the data in a short amount of time.
Less assumptions, less guesswork.
Hard Problem #4: Resource Scarcity
Resource scarcity comes down to not having the hours available to tackle the difficult problem of unpacking CAC. It’s real. There’s no denying it.
How do you spend your week working on calculating CAC by channel when your best sales director just left to move to a competitor? You don’t. That’s where it gets hard.
Most companies look at their people as either busy with important work or not busy and a waste of money. Let’s assume that all of your employees are in it for your mission and want to do what it takes to grow your business. Therefore, they are working at about capacity.
Would you rather:
- Have people work on things that don’t provide much or any value, OR
- Spend that time exploring how to solve harder problems
The clear choice is working on harder problems that build a better product or a better business. Calculating CAC is a hard problem that you need to tackle, but only at the right time.
To me, calculating CAC is a core component in raising your Series A and Series B rounds, so you have to prioritize it when that time comes. But I contest that you need to find time to allocate resources to it. If a core component of your business is fundamentally broken, that’s a more important thing.
For companies that are done fundraising or bootstrapping and are profitable, CAC is crucial. It’s fundamental. It’s a business level KPI.
Is it important to your company right now? Then make time for it.