Do Not Trust Your CAC

Punchy and controversial headline? Check.

Muddy acronym to keep amateurs away? Check.

Reader hooked for a few leisurely minutes? Check.

Great.

Let’s start with what CAC stands for.

This is your Customer Acquisition Cost; how much you spend to convert new customers. You get this number by adding up all your costs to acquire new customers over a certain time period. Those costs will most likely be your Sales and Marketing expenses for the period.

Tada – there’s your CAC!

This approach is simple enough, but the problem is that there’s no universally accepted way of approaching and calculating CAC. And, if you think about it, that kind of makes sense – all parameters just aren’t equally important for all businesses.

CAC isn’t a properly “audited” number that is regulated – it’s simply a made-up metric.

The problem with this is that it then lets everyone tweak their CAC numbers to their advantage. Some will leave out counting sales reps that aren’t fully ramped yet, or people that were let go. Others might argue that Recruiting Costs should not be part of it at all. A third one takes it to the extreme and even adds partial rent and lunch expenses. A fourth might add CSM costs or Account Management to the total.

To make matters worse, in many cases these calculations are simply “wrong”.

Because of this, the metrics of CAC are very, very flexible.

“Is It Loaded?”

So then by default, CAC is something of a loose metric, and an investor asking “Is the CAC fully loaded or not?”, is not at all uncommon.

The reason why they’re curious about this is that people tend to get hyper-creative with their CAC, and like to take things out of it, rather than putting anything in. The “Fully loaded question” is testing you on this – they’re really asking “How much did you fiddle with this number?”.

But your CAC troubles won’t stop there.

Once you played around with the CAC definition, now you are asked to use it for CAC-to-LTW, or some other metric, and – you guessed it – all of it will be completely useless and the whole thing won’t make sense anymore.

Ok, but let’s say you’ve managed to figure it out and you now have a solid, clean CAC definition.

What do you do with it? What can you do with that number?

Is it a good thing to have $10M CAC or $100M CAC? And even if you break it down per customer, does it actually tell you anything other than that one company has 10k CAC per customer and another one has 100k in CAC per customer?

Honestly, your CAC is not particularily useful by itself.

The Superior Key Metric

Instead, you should be looking at your CAC Payback, also known as your break-even point. This is the time it takes the company to recoup its spending. Intuitively, the shorter the Payback period – the better the business is doing.

Determining your CAC Payback is better for more than one reason.

Firstly, it shows you the true efficiency of your sales and customer acquisition. Getting those numbers will then enable you to reallocate funds into growth plans and even more customers.

The value in finding your CAC Payback is that it gives you a metric that’s comparable to others, and your CAC is no longer floating around in some vacuum.

Longterm, you should even aim to break down your organization into tiny little CAC Payback streams and get an even better understanding of their efficiencies. Once you do this, you can actually now start using your CAC Payback as an actionable metric.

Is your CAC Payback the highest in the US? 

Or at its highest in your Outbound? 

Or even Outbound within the US?

These are insights you can use and plan around. Maybe you want to make a big play for the US market? Then this is the way to go.

But if you are actually worried about cash and are trying to find the cheapest ways to grow, well then just steer your budget away from the expensive stuff, and move towards the cheaper ones.

Much smarter, right?

CAC by itself is not very reliable, but its cool cousin CAC Payback is the sort of friend that will help you move, come pick you up at the airport, and actually give you real help in running your business.

Toni and Mikkel talked more in-depth about why “CAC is caca” in our podcast The Revenue Formula. When you want to learn more, you find it right here: