What is Customer Acquisition Cost and Why it’s VERY Important

When you start running a business, it can become very confusing to keep track of every metric and KPI that is supposed to measure your startup’s success.

 

The truth is that while many metrics are good for getting a general idea of your company’s financial position, very few actually give meaningful, long-term insights into the sustainability and success of your Pakistani startup.

 

These long-term, valuable metrics are what venture capitalists and investors are interested in when it comes to business valuation. When performing their due diligence, investors will pay special attention to certain metrics. This includes the customer acquisition cost (CAC).

 

What is Customer Acquisition Cost (CAC)?

The customer acquisition cost (CAC) refers to the best, most accurate estimate of the total cost of acquiring a new customer. There are many costs involved in bringing in a new customer or client. These costs involve sales staff salaries, advertising expenses, marketers salaries, etc..

 

All of these costs are totalled up, and then divided by the total number of customers that you acquired during the time period. This will give you the total CAC.

 

The formula for calculating customer acquisition cost (CAC) is simple:

 

CAC = Total money spent on sales/marketing to acquire customers / Total number of customers

 

Why is Customer Acquisition Cost Important for Your Business?

Now that you know how to calculate CAC for your Pakistani startup, you may be wondering why it is important.

 

The primary reason is that it is used in comparison with Customer Lifetime Value (CLV), which shows how much revenue you will acquire from a single customer over the lifetime of their relationship with your business.

 

If the CAC is larger than the CLV, or if there is not enough of a difference between the acquisition cost and the customer’s lifetime value, then it indicates that it may not be profitable or justifiable to continue spending that amount of money on acquiring customers.

 

Secondly, investors are usually very interested in the CAC, and it is a large part of their due diligence. This is because when you apply for venture capital or another type of financing, investors are interested to know how much of their capital will be spent in bringing customers into the business. Once again, this is compared against the CLV to determine whether it is a worthwhile investment.

 

Find the Best Financial and Accounting Help for Your Pakistani Startup

Now you know why the customer acquisition cost is important for your business! However, there is still a lot more to learn. For the best financial, bookkeeping, and accounting services in Pakistan, turn to Vixperts! We help Pakistani businesses and startups make wise financial decisions while helping them to raise millions of dollars in financing! Contact us today.

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