The Takeover with Tim and Cindy

What Should You Be Paying to Acquire a Client? The Ultimate Guide to CAC

Tim and Cindy Dodd Episode 90

Do you know your company's Client Acquisition Cost (CAC)? If not, you’re likely making decisions in your marketing and sales efforts with incomplete data.

In this episode, we’re breaking down step-by-step how to calculate CAC, debunking common misconceptions, and explaining why understanding this number is CRITICAL to scaling your business profitably.

By the end of this episode, you’ll have a clear step-by-step guide to determine your CAC and make more data-driven decisions to scale your business effectively.

Episode Highlights

00:00 – Why the Most Profitable Companies Know Their CAC Inside and Out
01:50 – The Right vs. Wrong Way to Approach Your CAC Calculation
04:12 – How One Business Grew by 35% Year Over Year by Mastering CAC
08:04 – 5 Simple Steps to Calculate Your CAC
11:38 – Why You Need to Segment Your CAC by Lead Source
15:47 – How to Measure CAC Against Lifetime Value (LTV) for Maximum Profitability
19:22 – How to Optimize and Scale Based on Your CAC Data

Resources: 

Episode 71: Marketing For Dummies: The No-Nonsense Guide to Marketing Terms!

Download The Free Outbound Sales Playbook:

  • Master cold outreach, close more deals & drive revenue to your business using The Outbound Sales Playbook. Battle-tested on over 1,000+ businesses and proven with over 100M data-points, this Free E-book will give you the tools you need for predictability and scalability in your marketing and sales efforts. Disclaimer: Only download if you want more customers!

Join The Takeover Community:

  • Sign up for The Takeover newsletter and get the latest marketing tips, sales strategies, and business insights delivered straight to your inbox. Join a community of entrepreneurs & high-performers dominating all areas of Sales & Marketing. Sign up for the newsletter.

About The Hosts:

  • Tim & Cindy Dodd are the Co-founders of PEMA.io, based out of Miami, FL. Connect with Tim and Cindy: Instagram

About PEMA.io:

  • PEMA.io is a Inc 5000 Outbound Marketing Agency specializing in Enterprise Sales & Appointment Setting. With over 7-years and 1,000+ clients served in the industry, PEMA is the leading agency for cold outreach appointments & systems. Learn more about PEMA.io here: www.pema.io/discover

00:00

Simply put, the most sophisticated companies, marketing and sales departments know their client acquisition cost to the T, right? Like they know the number, like down to the last decimal point, and that is what is allowing them to scale and consistently scale, but also tap into their total addressable market because they know how much they can spend to acquire a client, they can continue to expand and to grow. Think about what total resources, what are all the time, human capital, money capital.


00:30

how much resources is going in to acquire that client. And that might seem overwhelming, but that's gonna give you the best understanding of what your true client acquisition cost is. Because when you can get to true client acquisition cost, that allows you to make incredibly intelligent decisions. Welcome to The Takeover with Tim and Cindy, where we show you how to dominate every area of life in business. Let's get winning. Do you know your company's client acquisition cost?


00:59

we get asked, what should I be paying to acquire a client? Well, in today's episode, we're going to walk you through the exact step-by-step process to understanding how to calculate your client acquisition cost, which is an essential number you need to understand in your marketing and sales, but also some things to think about around client acquisition and some assumptions that people have around CAC that we want to debunk. So.


01:25

Lock into this episode. Let's dive in. How do you calculate your client acquisition cost and what should you be spending to acquire clients? Let's go, Tim. Yeah. Let's first start off on, don't look at your client acquisition cost is like, well, my current business model, what can my current business model support? So what I mean by this is say you're, you know, you're growing, maybe a lot of your stuff has happened from.


01:50

just organic growth. If you're not currently spending money to get clients and you don't currently have a very solid and predictable client acquisition cost, chances are your first go at this might be a little bit off. So here's a mistake that a lot of companies make is they go, well, here's my business model. I have this much margin. I'm gonna allocate this small percentage to my client acquisition cost. Okay, so now I have $800 to acquire a client. You go, okay, so you're telling me your client value is $250,000.


02:19

and your expectation is to acquire a client for $800. So it's off. So what you don't wanna do is you don't wanna start with, okay, what can my business model support? What you wanna do is you wanna go out and figure out if I'm going to acquire clients from multiple channels, it could be from ads, it could be from building out your SEO, your content, long-term game plan there, it could be outbound, building an SDR or BDR team, whatever those.


02:47

You gotta look at all the channels and go, what is the real client acquisition cost for my industry and my company gonna be for all these channels? Then you wanna build your business model to support that because I promise you the client acquisition cost is not cheap, it's not gonna go down, it's not gonna get less expensive. Maybe temporarily new technologies come out. If you're a first adopter, you use it, you get a lower client acquisition cost, then everybody jumps on it and it goes back to what it was, right? Which is always rising. And so,


03:17

You want to first figure out all of the different channels that long term I wanna be playing in and getting clients from, then figure out truly what is my client acquisition cost gonna be on those channels, full client acquisition cost, which we'll talk through how to calculate that, then build your business model around supporting that with extra for margin because the industries, the markets can change super quick, and those with the most allocation for client acquisition


03:46

are in the most margin to be able to do that are gonna win. I mean, one of our clients we just took on, they've been doubling in size every year for the past seven years. They put 30 to 35% of their revenue to client acquisition. So they understand that, and that's why they've been able to grow so much. So as we go through this how to calculate it, you want to first figure out what the real client acquisition cost for your industry is, and can potentially inflate to be.


04:14

on all different channels and then you reverse engineer your business model to support that. Yes, one thing that we've noticed working with so many businesses, especially on the marketing and sales side, is that people have very wrong expectations around what their client acquisition cost should be. Very often it is lower than what it actually is or what it should be. So keep in mind for scalability, for being able to acquire clients in markets and in the


04:43

always fluctuating, that's always changing, where client acquisition costs will skyrocket. In order to be able to sustain your business and to be able to scale long term, you have to have realistic expectations around what you should be paying to acquire a client. So keep that in mind that what you potentially are thinking right now in terms of your client's acquisition costs may be way off from what it actually takes to acquire clients, whether it's through outbound, direct outreach, paid ads, all of those good things.


05:12

And there's a lot of misconceptions around how people actually calculate client acquisition cost. So we're gonna walk you through the step-by-step on how to calculate that specifically. Yeah, and remember, the more market saturation you have, the more expensive it gets. Getting your first few clients can be incredibly cheap. Doing your first, scaling up your first ad campaigns once you get a dollar, it's great. The moment you wanna scale and saturate a market, it gets more and more expensive to keep growing too. So you gotta also keep.


05:42

that in mind. I'm going to give you one really another really good reason why you want to have these numbers. It's super important. So, you know, I was talking to a client of ours the other day when we were in the process of bringing them on, said, hey, what's your client acquisition cost? The guy knew it. It was $200,000 lifetime gross profit. So he wasn't even thinking like lifetime values and lifetime gross profit. This guy knew it down to the profits. He said, what's your client acquisition cost? And it was like eight or nine thousand dollars. I'm like, great. So I know


06:11

this guy's got his stuff dialed and he knows what his real client acquisition cost is, he knows what he's going to make on a client, and guess what? He's the number one in their niche, in their industry. I'm just absolutely dominated and saturated. So having that kind of experience and expertise allows you to go to any, if you're outsourcing, if you're bringing a team in house, that gives you the ability to make very, very, very calculated decisions, very data-driven decisions.


06:38

And when you talk to like, you know, at Pima, we're very high level. We talk to a lot of people. We can tell companies that have their stuff together and we'll turn you, we'll turn you away if you don't, because we make money when you scale. And if you don't have the, what's needed to scale with, with our lead processes, we don't want to waste the time onboarding you. But a company like this, when a legitimate lead generation company you're talking to, they're going to see that you have your stuff dialed in and they're going to be salivating at the mouth. Like we're going to scale this company big. So having that in place allows you to make data driven decisions.


07:07

It allows you to attract very, very high level talent for your company, you know, whether hiring CMOs and hiring sales leaders as well as outsourcing, like really high level lead generation companies. They don't want to work with people that don't have their stuff together. Yes. Right. And when you have your stuff together, it'll just, it attracts better people as well as it allows you to make that data driven decision. Absolutely. Yeah. Simply put the most sophisticated companies, marketing and sales departments.


07:35

know their client acquisition cost to the T, right? Like they know the number, like down to the last decimal point. And that is what is allowing them to scale and consistently scale, but also tap into their total addressable market because they know how much they can spend to acquire a client. They can continue to expand and to grow. So let's dive into what are the five steps to calculating your client acquisition cost. If you've never calculated it before, this is a really simple guide on how to do it.


08:04

Take out a pen and paper, a notepad if you need to, so that you can start to jot some of these things down. We made it very simplified, but of course there's several different ways that you can calculate it. Here's what we found works best. So you wanna start off by calculating your total marketing and sales expenses. Yeah, and this is literally everything. It's gonna be the software costs, and it's gonna be the tools that you have to use. And big mistake that people make.


08:32

is that they don't calculate the management fees, right? It could be the management cost of you managing your internal team or the management cost for an ad company you're hiring. Too many times they'll see people come in and they go, here's our client acquisition cost on our Facebook ad channel. And they go, well, what is your client acquisition cost? How much are you investing to, how much are you paying that ad company to manage? How much time is being spent to manage the ad company? How much time is being spent and money is being spent? How much, think about,


09:01

what total resources, what are all the time human capital, money capital, how much resources is going in to acquire that client? And that might seem overwhelming, but that's gonna give you the best understanding of what your true client acquisition cost is, because when you can get to true client acquisition cost, that allows you to make incredibly intelligent decisions when it comes to, do I outsource this piece, or do I keep this in house? Because if you don't, you know, if you're outsourcing,


09:31

you might think that the client acquisition cost is lower or higher. When in fact, it's different because if you're not calculating all the pieces, then it can be messed up. So think about end to end. What are all the time and human and financial resources that go into acquiring a client and calculate the expense on all of those? Yes. Here are some examples of things that you can include in this calculation. But again, try to make it as comprehensive as possible. Every single marketing and sales expense. Hey there.


10:01

Make sure that you are staying on top of your game by following the show. Hit that subscribe button for the takeover with Tim and Cindy wherever you are listening. Let's get winning together.


10:15

So advertising cost, sales team salaries, marketing team salaries, content creation, tools, platform, event sponsorships. Anything that's an expense that's directly related to marketing to sales to attracting new clients, jot those down, that's gonna be your total marketing and sales expenses. I mean, as a business owner, as a department lead, you should know these numbers already. But start to think about, are there any other expenses?


10:44

that are going into my marketing and sales that I'm not thinking about yet, and try to include everything in this first step. That takes us into step number two, which is to track new client acquisition. Simply put, you are jotting down how many new clients did we sign up, the total revenue that came in from new clients. Yeah, so point two is pretty simple. It's how many new clients did you get? That's it, make sure you're tracking by each, you know, referral versus.


11:09

ads versus outbound. Yeah, so you could do this really simply on like a software. If some people use it, they have CRMs to calculate. Maybe you have a very detailed like tracking spreadsheet that captures every new client acquisition, but just making sure that those numbers are accurate at every point in that conversion cycle. It's not closed, so it's closed. Right? Right. Don't include anybody that's in the pipeline in this number. Step number three is to perform that basic client acquisition cost calculation, which simply put is,


11:38

The total that you calculated for step one, which is total marketing and sales expense, divided by the number of new clients that you brought on, and that is going to give you your client acquisition cost. So for example, if I spent $50,000 on my marketing and sales expense, and I brought on 10 new clients, that is simply gonna be $5,000 for a client acquisition cost. So very basic calculation again, total.


12:05

Marketing and sales expense divided by the number of new clients. That's going to give you your client acquisition cost. Once you know your overall client acquisition cost, the next step is to make sure it's segmented by marketing channels, by lead channels. Essentially, what are all the different channels that I'm using? What are the total costs of each channel? What is the total closed deal of each channel? And you will have a segmented client acquisition cost. And here's something very, very important to note is


12:33

some channels are gonna have way more, a lot better client acquisition costs than others. You don't always wanna cut a channel just because it has a higher client acquisition cost than you would like, but you're kind of looking for, and this is similar to anybody that runs ads knows this, you're looking for the overall performance of these channels. Unless one is incredibly just terrible, if one's like, oh, it's not great, but it's still getting us clients.


13:01

If your overall client acquisition cost is healthy, it's okay to have a couple channels that are like, oh, these are producing super well, and then other channels is like, oh, it's kind of expensive, but it's still within a margin. Don't cut those. Don't try to just, we're just trying to get the lowest, lowest, lowest. Think about just the overall, overall client acquisition cost. But this also allows you to know where, hey, let's double down on these channels, because you'll find no matter what channel there is, there's a limit, there's a border. You're gonna hit with that. So...


13:29

You don't want to cut one just because one's a little bit out of what you'd like to pay for client acquisition if it's still within margin because that channel is getting you clients when the other channel, yes, scale up the lower client acquisition cost channel as much as you can, but it's going to have borders. There's going to be a limit to every channel. If you have five channels producing five different places to get clients, keep them all going unless it costs you more to get a client than you make in profit. Yes, that's such good things to keep in mind.


13:58

out one channel because it's under producing, but looking at the entirety of that client acquisition cost. And I think too, over time, the more you know your numbers and the more that you're tracking these metrics, you can start to see, okay, maybe we just got our best clients just from this one channel, right? And we see it's the client acquisition cost is maybe not the cheapest, but our best clients came from this channel. Let's like double down replicate that and see how we can actually get more conversions and decrease that client acquisition cost.


14:26

So we can get more best clients out of that, for example. Right. And that's understanding lifetime value, right? Understanding the value of a client. Cause we've seen that happen a lot in the past when we were running, working with smaller businesses and we were, where we would have channels that would produce way cheaper meetings and then they would close rates, but they were not the best clients for other channels. It was, it was harder, took longer, but man, these clients were super good. And so just thinking about that is.


14:52

That's a great point is another number to know is what the lifetime value of the lifetime gross profit of your client is. So this is one number. It's incredibly important to have in the whole process, but there is other, it's not going to be a hard and fast, like if the number goes above 7,000, then cut it. If it, and if it's below 5,000, double down it. Like this on a hard and fast road, you got to look at the other numbers in your company, but this is going to be one of the most.


15:18

the important indicators that you can have in your company. And remember, kind of going back to earlier in the episode, it's also important to, you can't decide what you want your client acquisition cost to be. You must figure out what it actually is. Yes. So figure out what it actually is, what it currently is, and then what the market is determining that it will be not just short term, but long term. So that takes us really nicely into number five, which is calculating the lifetime value to CAC ratio.


15:47

So just really understanding the ratio of the lifetime value, meaning how much is a client worth over the lifetime. And if you have a newer product or a newer company, you don't know what that is yet, you can do some guessing here.


16:00

But if you are a longer company, you understand, hey, our clients normally stick around for four or five years or two years or one year or whatever that is. You can calculate your lifetime value, what a client is worth over the lifetime to your client acquisition cost. And what is that ratio typically that we're looking for? I've heard like three to one is really good for like startups, SaaS, etc. Like what should people be aiming for that lifetime value to cap ratio? You know, it's a really good question, but it does depend a lot on your industry. And I think this is another number that.


16:29

You don't want to try to go, well, I want this number and I'm going to try to force it. You got to figure out what is your, you know, you could figure out what's the industry norm. It's not that hard to figure out for your industry, for your company. What's the industry norm? Step one. And then kind of really dig into that and then go, now, how do I make sure that my business model can support that and beat that? Don't try to do what we were talking about earlier. Well, I'm going to get an $800 client acquisition cost and I'm going to do no, no, like.


16:57

you're not gonna, if there is giants in your space that are already dominating and winning, first off.


17:02

you know, repeat successful actions. Like look at what they're doing. They got there because they're doing something smart. Yeah, you might have some innovation, some things that you feel like are better than what they have, but they've done a lot of really smart things. They got them to where they're at. So figure out what are the giants in your industry? What are the people absolutely dominating? Not what are the other companies about your size or a little bit beyond you? What are the giants doing? And what were they doing to get to where they're at? And then just replicate that. And then once you understand


17:31

what those numbers are for your industry, then set that as a baseline, and now you have a target to reach, and then you can do what's called, what we call it our company Pima, stretch goals. Or it's not that we came up with a stretch goal idea, but we do that all the time. It's like, here's the goal, which is the minimum we're shooting for, that might be 30% under baseline, right? Then there's like the baseline goal, and there could be like a stretch goal, where you're just like 30% over what the industry baseline is. Businesses that understand their numbers the most, or the best.


18:00

are the businesses that win in the long run because they can make the most strategic decisions. We have an entire episode on lifetime value, how to calculate lifetime value, how that plays into your overall strategy for marketing and sales. So we'll link that in the show notes, but it's so important to know that with regards to lifetime value and client acquisition cost, the business that can spend the most to acquire client wins. Simply put.


18:25

The one that spends the most wins the most. Nice. The one that spends the most wins the most. Simply put, like the companies that can spend the most to acquire a client, they dominate because they can outspend you on a marketing channel any day. And very often those businesses that are spending a lot to acquire clients is because they have an insane lifetime value, right? They bring their clients on and they stay with them years and years and years. And that's why they can spend more upfront on client acquisition. So


18:53

Keep that in mind, we'll link that other episode where we talk about lifetime value in the show notes, but knowing your client acquisition cost is a critical component to your marketing and sales system. So we do hope that this episode was helpful in shedding light on some of the client acquisition cost processes and how to calculate it for your business. And like the ideas behind it, the winning ideas behind it. I like that, I'm gonna start using it. Those who can spend the most, win the most, right? But it's true because think about it like this.


19:22

If your client acquisition costs, you're like, wow, the most I can do is $5,000 because your lifetime value is low and you're coming up against me and I could spend $20,000 to acquire that client because my lifetime value is 10 times what yours is, which we see all the time by the way. Yes. Same meetings, same people, different product. I can absolutely destroy you in the marketplace.


19:49

I can spend more money in advertising. I can do more out bounds because I can justify spinning so much more money than you that I'm gonna be everywhere, which means that actually, and potentially in the long run, my client acquisition cost is gonna be less because I'm gonna saturate the market. They're gonna see me everywhere. Once somebody sees me everywhere, they trust us more. There's more authority built, and you're gonna win the space. So those who spend the most money.


20:16

Yeah, that's so true. So it's not to say that you have to inflate your client acquisition and go spend a bunch of money The summary here is to know what that client acquisition cost is because I tell you nine out of ten businesses Just don't know this number period like they have no idea So go back go through some of those steps that we described key here is to know what that client acquisition cost is


20:36

understand it in relation to your lifetime value for your business, and then start to make those strategic decisions to dominate your market with these tips.