Calculating CAC has been a hot topic in the SaaS and eCommerce space for the last 2 years or so–with good reason.
But if we followed the directions of every blog post by a “growth hacker” then we’d spend all of our time in Segment and Excel/Sheets and we quickly wouldn’t have a business to run reports for!
The key variable in this is time. Is this the right time to start calculating CAC and how deeply should I go into it? Let’s dig in on a few common scenarios.
Bootstrapped Founders
You’re probably working with a team between 1 – 10 at this point, with many of those being contractors, part-timers, or non-marketing roles like logistics, payroll, support. Everything is super lean.
No surprise here: don’t waste too much time on CAC.
Ultimately, you or your partner(s) is(are) very close to what is working or not working with marketing. You can probably attribute most of your customers to the few channels you’re actively working. You right hand knows what the left hand is doing.
For that reason, your cash flow is largely indicative of your advertising costs and revenues. If you are running 1-3 channels at this time, you need to have a source report in place to answer basic questions like weekly spend and conversions to customer. These are easy to setup. Google Analytics and any advertising platform will give you amount spent and total conversions.
As a bootstrapped founder, simply set up goals in Google Analytics and use basic UTM tracking–tracking issues are avoidable. Every month, look at how much you spent on a channel and revenue generated. It’s that simple.
In all honesty, I would suggest dropping this when things get too crazy. If you know you are cash flow positive then you can skip it quite often and update numbers quarterly unless you’re scaling your budget up 2x or more.
Iff you are utilizing 5+ channels and running into cash flow issues, you need to focus on the highest-performing channels and drop the bottom 3. Figure out the part of your marketing program works before expanding out to new channels.
Seed Stage Companies
Similar to the bootstrapped company in size, you’re probably searching for product-market fit with some of it figured out. In this stage, you want to be conscious of what the desired CAC is. Since you probably provided a business model to your investors and made some assumptions, you aspire to reach the CAC you provided to investors. All things equal, that’s the direction to head.
In this case, you likely have a business model you’re trying to achieve. Seed stage companies have a few different strategies that we can look at.
Find a profitable model and then scale
In my view, this is usually the best strategy to take on when you raise a seed round. Without going into my feelings about it here, it gives you lots of room to understand CAC and LTV and how each of the channels fit into your next phase when you raise a Series A round.
In this setting, you are going to spend a ton of your time testing and optimizing marketing channels and need to be tied to the numbers every week.
I think that the Bullseye Framework fits well here. Try to answer these questions as you are testing:
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- What’s the best guess for the CAC over time?
- How many customers exist in this channel?
- Are these the customers we want?
While thinking about these questions as they pertain to each channel, you’re going to have CAC on your mind. In other words, as soon as you start channel testing, you need to get your ass into gear with a simple CAC report.
If it takes ~3-4 hours per week to calculate this, you need to do it. Anything more and there’s likely an issue with your tech stack and you should do it right.
Scale and find a model along the way, aka the land grab
In this case, you’re probably not reading blog posts because all you are doing is hiring and working on engineering/product problems. The marketing your doing just has to be passable and you really only have vague boundaries of CAC.
This is also very rare and I don’t think this is a path to follow. It’s really just survivorship bias, purposeful misinformation, or blatant stupidity that drives this mentality. For this reason, it’s worth mentioning. If the data tells everyone in the company that you’re printing money, THEN assume you are pursuing this strategy.
Series A and Beyond: CAC Party All the Time
At the Series A stage, you should really have a profitable business model with at least 1 channel driving lots of customers. It may not be a profitable company or channel yet, but there’s a light at the end of the tunnel that you and investors can see.
At the same time, this is the perfect time to step up your tech stack and automate some of your reporting. There are plenty of analysts that can set you up for success but here are the major components to any successful marketing operation.
Your team agrees on 1 tech stack
For the love of all things good and evil: agree on a tech stack and go with it. I’ve seen (and heard more often) that teams are switching CRMs “because then things will be so much better”. It’s like switching CMS’s for better SEO: no no nonononooooo.
Don’t. Do. That. It’s a total bullshit trap.
Most tools, especially those as common as CRMs and CMSs, have roughly the same features. Unless you’re looking for a specific integration that your whole team agrees is Vital with a capital V, don’t waste too much time. Usually this means you’ve been using Stripe for transactions and absolutely can’t afford to move it. Or, perhaps you;ve built a custom API. There are a few good cases to make.
Much like your first business card, your website, or your company’s name…you’re going to hate it. Process is more important than tools when comparing apples to apples.
Don’t be the poor carpenter who blames their tools.
So find a basic analytics platform that is session based, like Google Analytics or Piwik. Then find one that is user-based, like CRM’s HubSpot and Pardot or MixPanel.
It really depends on your business model which one is better. I’d probably go for HubSpot or Pardot for B2B or one-time purchases and MixPanel for high-touch apps and low-priced eCommerce.
The only mistake is constantly hopping between them or not utilizing them.
You have an engineer-less method in place
Even in Series A company, it’s not as if the marketing team has a team of engineers at their disposal. They should be working on the product most of the time, leaving your team to handle all of the reporting and as much of the testing as possible.
For AB Testing, there are easy solutions in place like VWO. But for reporting…not so easy.
Reporting may require the use of several tools: Segment, Google Analytics, Periscope, BigQuery, Google Sheeets, ad platforms like Facebook and AdWords…you get the picture.
The key here is getting the data into one place so that your marketing team can access it. I suggest using Google Sheets since most data sources can push data here. From these sheets, you can import the data to other sheets, make pivot tables, or use tools like Google Data Studio.
The manual part of analysis and reporting is cumbersome. Don’t get FOMO about everything being automated for other people.
Why not you?
Yes, I know.
Getting in the weeds of manual reporting gives you space to think about the data and what it means. I still perform the role of analyst and manually create parts of reporting. Those are where I gain the most insights.
This time is more valuable than any tool you buy, so take advantage of it. More on that soon.
You have at least 2 people looking at the numbers
Things break all the time. Especially when you’re growing, new hires may be at the mercy of poor or nonexistant documentation and you may be hiring and not training the way you would like to.
For that reason, it’s important to have at least 2 sets of eyes on the numbers week over week. As a founder or Director of Marketing, you’re going to catch most of the problems when you see them. But it still hurts you and your leadership to catch those right before your Monday review.
Not only will the rate of errors drop, you’re familiarizing more people with your tech stack and your acquisition channels. Even at large companies, pixels get stripped for no reason. One engineer may have asked the wrong marketer and you miss out on 72 hours worth of important conversion data. I’ve has this personally ruin tests and be the cause of tension between teams.
The CAC & LTV Reality
The cold hard truth is that all this CAC and LTV talk is kind of crazy. It’s a measure of the outcome of all of your work, so it’s not a lever you can pull to make things change.
Your SaaS product may have a high churn rate after month 3. If you don’t dig that hole then you’ll feel pressure to drop your CAC. That’s the wrong thing to do (unless your burn is here).
In many ways, your CAC and LTV are going to be dynamic untill you reach the next level of investment or turn profitable. And with every market segment you expand to, you’re going to have to change the way you calcualte it.
While you need to keep the ratio favoring LTV, it’s not as important as you think for early-stage companies. It’s a number on a dashboard that tells you when things are working or not, just like conversion rates, cost per leads, and visual marketing funnels.
The reality is that CAC is simply the starting point for more questions. It’s a clue that says: DIG HERE. Only HERE is a mile long beach with people napping on towels where you want to dig…
Better start digging. But don’t dig too deep too early or the tide will come in and wash your work away.
(Eh, kind of works.)
