When estimating your total marketing spend, is it a good idea to use a Customer Acquisition Cost (CAC) variable in your projections? Let's say you have a marketing mix that consists of the usual items (CRM, Marketing Automation tools, trade shows, some PR, Web site/SEO, etc..). On top of that you have your marketing and sales staff. All of these items are quite easy to quantify and estimate. What's harder to forecast is your ad spend (paid search, lead gen...). So instead of allocating some arbitrary budget figure, why not come up with a CAC amount and multiply it by the number of customers you're forecasting? Of course the CAC value would be different for different types of companies. An enterprise SaaS would me much higher than a consumer based company like Dollar a Shave Club. I was speaking to one medtech CEO and he was telling me his CAC is about $700 per new customer! He's in a somewhat similar business but not a competitor to me. This is on top of his general marketing spend and salaries. He expects that figure to come down as they refine and perfect their approach. He says that CAC is probably the biggest element that companies underestimate. Everything takes longer and costs more.
So I was thinking of using a variable of perhaps $700 per new customer. I'd lower it slightly each year. So if I expect to sign 100 new customers this year, my total CAC would be $70K in addition my marketing and sales spend. Does this approach make any sense? Is there a better way?
I read an interesting article some time ago that suggested looking at the following could help you decide if you are spending enough or too much for acquisition. If I can find the link again, I will post it here.
The key measures are CLTV (Customer Lifetime Value) and CAC (Customer Acquisition Costs). The argument is taking the ratio CLTV / CAC will give insight into your spend in customer acquisition. The author / organization suggested that a sweet spot is 3 x - 5x CLTV to CAC. If the ratio is too high.... 6x or higher then there is not enough money being spent on growth and customer acquisition. If the ratio is too low such as below 3x then too much is being spent wastefully. This could be a good approach for you to validate your CAC estimate. Of course… you may want to do some other benchmarks as your ratios could vary depending on your product / service.
I found the link: https://salesbenchmarkindex.com/insights/why-your-sales-leader-needs-to-understand-cac-and-cltv/
Daniel: Thanks for sharing. This is a good way to look at things. In the example shown, I'm wondering how CAC and CLTV are calculated. These must be after the fact or backward looking figures. I'm trying to do the reverse: predict CAC and determine how much I would need to allocate as a reasonable customer acquisition budget. I can come up with a CLTV figure. I suppose I could run the numbers to show me what my CLVT:CASC ratio looks like and see if I come to the 3x-5x sweet spot.