For consultants, having a high client acquisition cost (CAC) is not inherently a bad thing - sometimes, it's a sign you're doing things right. Let me explain why.
For those of you who are not familiar with it, CAC is the amount of money a company spends to get a new customer. It's one of the most common indicators to measure marketing and sales effectiveness in both B2C and B2B companies.
The formula is pretty simple - add up your marketing and sales costs and divide by the number of new customers you acquired. If a SaaS company spent $20,000 on marketing and sales in a year, and it was able to acquire 500 new customers, the CAC would be $40.
A $40 CAC is neither high nor low by itself - it's usually compared with your customer lifetime value (CLV, how much the company expects to make from each customer) and your payback period (how quickly can you recoup the cost of acquiring a customer). But let's come back to the consulting world.
You're In Consulting, Remember?
Mirroring B2B companies outside their industry, many consulting firms obsess over reducing CAC. If we can spend less to bring in each additional client, more money in our pocket right? Not necessarily.
Here's why I think lowering your CAC is a huge strategic mistake: you're playing a different game, with different assumptions. And a lot of it comes down to positioning and specialization.
Let's say you run a series of marketing experiments, and discover two good avenues to find new clients:
- Running LinkedIn Ads + offering free audits, with a CAC of $1,000;
- Sponsoring roundtables and social events for selected executives, with a CAC of $3,500.
Many consultants would pick the first option without thinking twice. "All you need is a productized service to build a profitable business." Putting aside the unintended consequences, they'd be right.
But here's my idea: Start with the cheaper clients, and build up your economics so you can afford to acquire the $3,500 prospects, even if they're not that profitable for you.
Why? Because that makes it impossible for the people trying to knock you off to afford to be in all the places you are. That’s how you dominate your niche and end up with the best clients.
If you're in consulting, you're playing the long game. Act accordingly.