CAC explained for contracting businesses (And how to profit off it)

CAC is one of the most important numbers for every business owner to know. But firstly what even is CAC? Well it stands for Customer Acquisition Cost, which is how much money it costs you to get a new customer. For example, if you pay $100 to get 10 leads and 3 of those leads become customers, your CAC is $33. It’s just your total marketing and sales spend in a certain time period divided by the number of customers you got in that period. 

Why does CAC even matter? CAC is oftentimes a “hidden” cost in your business. If you’re not aware of exactly what it is, you may think you’re profiting off each customer but your CAC eats up all of your gross profits, so at the end of the day, you aren’t actually profitable. 

With that said, we want to constantly measure our customer Lifetime Gross Profits (LTGP) to our CAC. We want to keep our LTGP about 3-6x higher than CAC. That way every client you get, pays for you to get 3-6 more clients. If you have this ratio down, growing your business is no longer about how many customers you can get. All you have to do is figure out how you even service more customers.

So here is what happens when the ratio is not right. Firstly you’ll feel that leads are really expensive. No matter the platform or the way you advertise leads either feel super rare or super expensive. This is a very clear sign that you don’t have the ratio right at all. Secondly, you’ll feel like money goes out of your business much quicker than it goes in. Even if you have a great month where your calendar is packed, at the end of it all of that money essentially disappears and never sticks to your bank account. That is a very clear indicator that your CAC is likely too high compared to your LTGP.

Ok so how do we get that ratio of 3-6x CAC? Number one is to increase LTGP, this is by far the easiest way to do it and if you haven’t already tried doing this, I highly recommend you start here.  Even if CAC goes up (which overtime it just will), if you increase your LTGP you’ll almost always make more money. Think about it, if you profit $90 from 3 customers you’ll make more money than if you profit $20 off 7 customers. So it doesn’t matter if you end up with less customers, you still have more money and that means that you have more money to spend on getting even more customers. So ultimately you are able to go through enough leads to get yourself 7 customers (or more) that you profit $90 on. 

Once you have the profitability part down, now we can focus on decreasing CAC. One of the biggest reasons that we want to focus on LTGP first is that the returns there are almost infinite, we can infinitely increase how much we profit but we can’t infinitely decrease a fixed cost. At most you can save your current CAC on each customer, that’s it. Whereas by improving LTGP we can make thousands more in profits on each customer. 

There’s a couple ways to decrease CAC, number one is improving conversion rates. The key is to improve conversions across your entire funnel. From website visits all the way to estimate conversions. This way if you pay $100 to get 10 leads, now you convert 6 instead of 3 of them. Taking your CAC from the original $33 to $16.50. This is huge at scale, that’s why we first want to worry about LTGP as instead of adding $16 worth of profits per customer, we can easily add thousands. 

So how do you scale your business from here? Well you compare your CAC to LTGP. If your LTGP is less than 3-6x what your CAC is, increase your LTGP and decrease your CAC until you get that 3-6x ratio. And if you need help with any of this, come join us on our free, 5-week Business Scaler Challenge where we take you and up to 20 other contractors on a 5 week challenge to grow your business. You’ll get the perspective and information you need to get over your current growth constraint no matter if it’s CAC or something else. So if you want to grow your business for free, sign up here: https://www.woopenvironmental.com/business-scaler-challenge/