Why you should never average your CAC - 2/26

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📰 Today's Edition: Why you should never average your CAC

Here's a question that will make you reconsider everything: How much does it actually cost you to get a customer?

If you just answered with a single number, we need to talk. (And yes, although I’m a purple hippocorn, I can still talk.)

Customer acquisition cost (CAC) seems simple on paper. Take your marketing spend, divide by new customers, done. But this is where most founders screw up. They treat CAC like one big happy average when it should be dissected, analyzed, and understood by channel.

Let's break down why averaging your CAC is costing you money (and potentially your business).

What exactly is CAC, though?

Customer acquisition cost is the total investment you make to turn a prospect into a paying customer. It includes everything: ad spend, marketing salaries, tools, overhead.

Simple formula: Total marketing and sales costs divided by number of new customers acquired.

If you spent $10,000 last month and got 100 customers, your CAC is $100.

Easy, right? My horn could calculate that. (Yes, I have a magical horn. No, you can't borrow it to fix your unit economics.)

But here's where it gets interesting (and where most people mess up).

Why is averaging a trap?

Picture this: You run three different marketing channels.

Channel 1 (Google Ads): Costs $5,000, brings in 50 customers. CAC = $100.

Channel 2 (Facebook Ads): Costs $3,000, brings in 30 customers. CAC = $100.

Channel 3 (Organic referrals): Costs $0, brings in 20 customers. CAC = $0.

Most founders do this math: $8,000 total spend divided by 100 total customers = $80 average CAC.

They pat themselves on the back and move on.

Wrong move.

That $80 average is useless. Why? Because you can't control organic referrals. You can't wake up tomorrow and decide to generate 40 organic referrals instead of 20.

But you CAN double your ad spend.

When you average everything together, you're mixing controllable channels with uncontrollable ones. You're blending apples with... well, free apples that randomly showed up at your door.

Listen, I'm a hippocorn. I understand magical thinking. Sometimes customers DO appear out of nowhere, like hippocorns in a meadow. But you can't build a business model around hoping for magic.

What happens when you segment properly?

Let's look at those same numbers, but smarter.

Paid channels (Google + Facebook): $8,000 spent, 80 customers acquired = $100 CAC

Organic channels: $0 spent, 20 customers acquired = $0 CAC

Now you actually know something useful. Your paid CAC is $100, not $80. And even better would be to segment by ad channel. if your product generates $150 in profit per customer, you know exactly what lever to pull: pour more money into paid ads and specifically the ad channels that are working.

Eric Bahn, co-founder of Hustle Fund, talks about how great founders "identify the most impactful metrics, and then get laser-focused on meeting those milestones". 

You can't focus on the right metrics if you're looking at averages that hide the truth.

How to actually think about CAC?

The whole point of understanding CAC is to build a repeatable marketing machine.

If you put $1 into your machine, how much comes out?

With Google Ads at $100 CAC and $150 profit per customer, you're putting in $1 and getting $1.50 out. That's a machine worth scaling.

But let’s say you only get $85 of profit out. If you averaged in those organic customers and think your CAC is $80, you might erroneously think to scale up your paid spend and suddenly the math doesn't work.

Your organic traffic won't magically double just because you doubled your ad budget.

What is the right way to track CAC?

Here's what you should actually do:

1. Segment by channel. Every marketing channel gets its own CAC calculation. Google Ads. Facebook ads. SEO. Partnerships. Email campaigns. Etc.

2. Segment by campaign. Within each channel, track individual campaigns. That Black Friday promo? Calculate its CAC separately from your always-on brand campaigns.

3. If you’re using seemingly “free” customer acquisition channels such as cold-emails or content, include ALL costs.Count salaries for the people running these channels. After all, your sales person or VAs doing outbound cold-emails cost money.  If you're spending money on content writers, there's a cost there. Divide that cost by the customers you acquire through these channels. That’s your CAC. 

You can't get better at your channels if you don't know what each one actually costs. 

What about the payback period?

The payback period is the number of months of gross profit it takes to earn back what you spent to acquire a customer (your CAC). 

Even with a healthy LTV:CAC ratio, you need to think about how long it takes to recover that acquisition cost.

Let’s say your CAC is $100 and your profit on your subscription product is $10/month, it takes 10 months to break even on that customer. Can your business afford to wait that long?

Startups die from running out of cash, not from having a bad LTV:CAC ratio on paper. The payback period shows you how quickly you recover acquisition costs, which determines how fast you can scale.

If you have not raised much (or any) money, then you probably can’t afford to wait 10 months to get to profitability. Typically, I (as a talking purple hippocorn) recommend an immediate payback period for bootstrapped founders, and a 2-3 month payback period for pre-seed to seed founders, because founders at this stage cannot afford to wait a long time to become profitable on each customer. 

What is your action plan now?

Although there are fancy tools that can help you track your spend by channel, you can start today without a lot of work. Open a spreadsheet and create these columns: Channel, Campaign, Total Cost, Customers Acquired, Profit per customer, CAC.

Fill it out for last month. Be honest about all costs. Look at which channels are profitable. Look at which ones are bleeding money. Make decisions based on real numbers, not averages that hide the truth.

Then optimize. Pour more money into channels with strong unit economics. Cut or fix the channels that don't work. Test new approaches in the channels that show promise. Rinse and repeat every month.

CAC isn't a single number you check once and forget. It's the foundation of your entire growth strategy. Great founders "experiment rapidly and measure everything". That includes measuring every channel, every campaign, every dollar spent.

Stop averaging. Start segmenting. Your business depends on it to fly high. 

Until next time, 

Dunky, the “flying high” hippocorn

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