How Customer Acquisition Cost (CAC) can ruin your startup

Often times, we’ve heard of startups pack up a few months after launch.

While passion is a real thing, the reason most startups exist is to make money, a lot of it.

After a product launches, the next step is to have as many people as possible using the product, no one builds a product hoping too many people wouldn’t use it. This is where Customer Acquisition Cost (CAC) comes in, it is the amount of money spent on acquiring of the revenue generating users for a product.

After launch, a startup will most probably spend money on everything that will drive sales, like expanding the sales team, getting tools that will drive sales, customer support for retention, etc.

The problem begins if the CAC is higher than the Lifetime Value (LTV) of the customer, some customers are going to be one-time users, imagine if a fortune has been spent to acquire such customers.

The trick is to make sure that the LTV is at least three times the CAC, and make sure that you can acquire the CAC back within a year (in the case that the customer continues using the product).

To be clear, you might do everything right and still have customers that won’t return after the first time, its mostly because they really do need the product only that one time. To tackle this, make sure your team does everything right for every customer during their first purchase to leave no room for doubts, this way, you are clear that the customer isn’t leaving because of something you did wrong, but because they genuinely don’t need the product. What this does is that you can focus on acquiring new customers.

Please note, it is cheaper to keep existing customers than to get new ones, but you also don’t want to waste your resources on dead ends.