Question

Topic: Other

Estimate Customer Acquisition Cost For Startup

Posted by bmcmahon28 on 2/8/2022 at 11:37 PM ET 250 Points
I have been asked to estimate customer acquisition costs for a Saas startup, but this doesn't make sense to me. I have been told it has to be proven but how can one prove something where there are yet no actual expenses? The product is still in progress and there is no understanding of market/product fit, features, benefits.

The cost for the service would be $40 per month, with an expectation that average customer use would span 12 months. There is no current strategy or marketing budget in place. No way to test assumptions.

I also have someone pushing LinkedIn Ads as a primary customer acquisition tool. The conversion rate for the ads is unknown without testing, but if we assumed 1-2%, this is not a profitable way of doing business. Yet, it doesn't sound like there's a budget to spend on ads until there are sales.

I am very confused and it seems impossible to navigate this one.
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RESPONSES

  • Posted by Jay Hamilton-Roth on 2/9/2022 at 6:45 PM Accepted
    As you've described the situation, you can't provide a proven number without any data [CAC = (Sales Costs + Marketing Costs)/New Customers]. At best, you can research the CAC for similar offerings to get a sense, but it won't be guaranteed to apply to your situation.

    You're right to be confused and frustrated.
  • Posted by bmcmahon28 on 2/9/2022 at 7:23 PM Author
    Thank you for your reply! Sometimes it's hard to know if I've got a lack of knowledge problem or if I'm just in a tricky situation.

    I sense there's a need to make the product profitable ASAP, or at least to appear so for financing reasons. While estimations are fine, they can't compensate for overly optimistic figures and projections, can they?
  • Posted by Jay Hamilton-Roth on 2/9/2022 at 9:22 PM Accepted
    It all depends on who's asking and why. If someone needs guesstimates, that's one thing. If someone's asking for investment purposes, that's another. If someone's trying to build a business plan based on this number, that's something else entirely.

    Is there any reason you can't go back and ask for more understanding of their needs, their expectations, and explain why CAC is based on data, not guesses?
  • Posted by bmcmahon28 on 2/9/2022 at 10:49 PM Author
    No, nothing stopping me from asking for more clarification. It's just a bit of an intimidating situation as this is coming from a very senior person in the organisation. Their request of me initially was just an estimated cost for some LinkedIn ads, and I had to break the news around conversion rates which were estimated much higher than what they had presumed them to be.

    I will carefully ask some more questions, explain myself, and see what happens.
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