Statistics show that 9 out of 10 startups fail, with 10% failing in the first year. Factors like high customer acquisition costs (CACs) are common causes of failure.
Learn why CACs matter, how to calculate them, and the factors influencing these startup costs. We will also look at the key acquisition metrics (and include their formulas).
Need help to optimize these costs?
For over 20 years, I’ve collaborated with startup businesses to lower their CAC by optimizing conversions and improving customer retention.
Working together, we can review and optimize the acquisition funnel for conversion. Using the most effective channels, we will improve your marketing strategies and conduct A/B tests on different messaging.
Schedule a discovery call with me today to drive sustainable growth and achieve long-term success.
Short Answer – What is a Customer Acquisition Cost for Startups?
Customer acquisition cost is the money a startup spends on marketing and sales efforts to attract new customers.
Businesses must also know the factors affecting the CAC costs to streamline their marketing efforts and optimize their approaches. These factors include:
- Product (or service) differentiation
- Customer segmentation
- Acquisition channels
- Business age
- Industry
How is Customer Acquisition for Startups Different in Terms of Costs?
Startups must understand the unique CAC challenges that differentiate them from established businesses.
Check them out below:
Costly Brand Awareness Campaigns
Early-stage startups face fierce competition, making attracting new customers in the already crowded market difficult.
Therefore, they must invest heavily in brand awareness campaigns, which incur higher costs.
Ineffective Marketing Strategies
New businesses often experiment with different strategies for small business customer acquisition before settling on the most effective ones. In the process, they usually end up overspending or wasting their scarce resources on ineffective customer acquisition strategies.
Longer Sales Cycles
Building stronger relationships with the target audience is a crucial step for growth, yet it’s one of the many difficulties startups face.
Ultimately, they take a long time to convert prospects into customers due to the need to build trust.
Unrefined Acquisition Funnel
New brands lack a streamlined acquisition funnel to understand their customer journey compared to established businesses that have refined their process to maximize conversion.
Therefore, startups end up with increased CACs.
What is the Average CAC for Startups?
The average CAC for startups fluctuates depending on the industry, target market, company age, and marketing strategy.
According to First Page Sage, here’s a list of the CAC for startups in different industries:
- B2B SaaS has an average CAC of $239. This includes $205 organic acquisition cost and $341 inorganic cost.
- Real estate average CAC is $791. The cost includes $660 in organic expenses and $1,185 in paid marketing costs.
- Education average CAC is $1,143. This CAC includes $862 organic acquisition costs and $1,985 inorganic costs.
They’ve also compiled the average CAC of B2C industries:
- B2C SaaS — $135 organic costs and $197 paid costs
- Legal Services — $189 organic acquisition costs, $457 inorganic costs
- eCommerce — $64 organic and $68 paid marketing costs
How to Calculate Customer Acquisition Cost in a Startup
As a startup, it’s crucial to understand the five steps to calculate the CAC, which will help you use the metric to make better business decisions:
Step 1: Sum the Total Marketing Costs
To get the CAC, a business must sum up the total marketing costs, including advertising, website design, and other expenses.
Step 2: Calculate Total Sales Expenses
The next step is to factor in sales expenses such as salaries and commissions, marketing software costs, and training.
Step 3: Determine New Customers Acquired
Get the number of new customers acquired in a certain period.
Step 4: Use the Formula
To arrive at the CAC, use this formula:
- Customer Acquisition Costs (CAC) = Total Marketing + Sales Costs Number of New Customers Acquired
Detailed Analysis – Customer Acquisition Cost for Startups
Understanding the factors influencing the CAC can help companies optimize their acquisition funnel and increase the number of customers acquired.
Check out an in-depth analysis of the factors affecting the CAC:
Product (or Service) Differentiation
A well-crafted value proposition and clear differentiators impact the CACs. Customers will likely pay a premium for an offering with clear USPs that solve their specific problems, reducing acquisition costs.
However, a product or service lacking a solid value proposition could face intense competition, leading to higher CACs.
Customer Segmentation
Brands often divide their target audience into customer segments based on common traits such as demographics, preferences, and needs.
They can then implement tailored marketing strategies that increase profitability and retention rates, lowering the CACs.
Acquisition Channels
A business’s marketing channel directly affects its CAC, reach, and lifetime value (LTV) of customers. For example, digital ads have a high CAC but a short conversion cycle and reach more prospects.
Conversely, organic SEO and email marketing have low CAC but a high customer retention rate.
Business’s Age
A startup business in its early stages often struggles to build brand awareness and position itself in the market.
For a company to implement strategies that lead to more sustainable growth, it must have a higher marketing budget and higher CACs.
Industry
Different industries have different average CACs due to the sales cycle and the level of competition. For example, a B2B business CAC averages $239, while one sector, CBD, has a CAC of $159.
Want to boost your customer acquisition efforts?
We can analyze and refine your value proposition to set your business apart. We will tailor the messaging to resonate with your target audience, enhancing your acquisition efforts and helping you achieve business growth.
Join me on a call to create actionable steps that factor in unique business needs, allowing you to minimize costs.
CAC Startup Metrics to Track the Performance
Businesses must master customer acquisition analytics to continuously review their strategies and use the data to make strategic decisions.
The top 5 metrics to track include:
1. Conversion Rate
The conversion rate records the percentage of prospects that convert into paying customers.
The conversion rate formula is:
Conversion Rate = Number of conversionsTotal number of interactions/website visitors
This metric measures the effectiveness of marketing efforts at converting visitors.
2. Customer Lifetime Value
The CLV indicates the average revenue each customer generates for a business over their lifetime.
CLV = Average purchases X Average purchase value X Average customer lifespan
A high CLV value shows practical retention efforts, while a low one indicates the need to optimize customer retention.
3. Return on Investment
Businesses should measure the profitability of their marketing efforts.
ROI = Net profits – Total costs of marketing / Marketing spend X 100
A positive ROI indicates the marketing tactics are profitable and justifies the costs incurred.
4. CAC Payback Period
This metric measures the time it takes for a business to earn back the money used for customer acquisition.
Months to Recover CAC = Customer acquisition costs / Average revenue per account (ARPA) ✕ Gross margin
A short payback period shows capital efficiency, making the company profitable.
Hire Nora to Optimize CAC for Startups Like Yours
Startups often have limited resources and are under pressure to grow faster. Effectively calculating and managing CACs is necessary to enhance their profitability and achieve long-term success.
As a customer acquisition consultant, I can help you to:
- Review and optimize your acquisition funnels to attract qualified leads.
- Create winning strategies that increase profits and allow scalability.
- Build an omnichannel strategy while ensuring we’re targeting the most effective channels.
- Craft personalized messaging that builds customer relationships.
Schedule a call today to discuss how we can revamp your marketing strategies and minimize acquisition costs.
Frequently Asked Questions (FAQs)
Here are answers to commonly asked questions about customer acquisition costs:
What is a Good Customer Acquisition Cost?
There is no definite answer to this question, as the CAC will depend on factors such as industry, business type, and marketing strategy.
However, you want a CAC lower than your customer’s lifetime value to ensure you are not losing money on every new customer.
What is a Good LTV CAC Ratio?
A good LTV to CAC ratio should be 3:1 or higher. This means the amount spent to acquire a customer (CACs) should always be lower than that a business earns from a customer over the lifetime (LTV).
What is the Best Way to Achieve Low Customer Acquisition Cost?
Collaborating with a customer acquisition expert is the best way to minimize CAC costs. I can help establish your market positioning, create targeted messaging, and nurture the audience to become (and stay as) paying customers. We can also make a funnel and maximize your marketing budget.
Conclusion
Understanding customer acquisition costs allows startups to leverage low-cost marketing strategies and refine their funnel.
Together, we can build an acquisition funnel that becomes a lead-generation machine. We will craft targeted messaging that converts leads into paying customers and track critical metrics to measure and optimize your strategies’ effectiveness.
Book a discovery call to generate a steady flow of customers with minimum costs.
