10 Expenses NOT to Include in Your SaaS CAC Calculation

SaaS CAC  

Most SaaS companies know that to run your business profitably, it is important to measure SaaS CAC.  Yet, managing this metric over time can become increasingly complicated as a company expands its operations and divides its resources into both acquiring and retaining customers.  Calculating SaaS CAC correctly is not as simple as dividing total Sales and Marketing expense into the number of new customers acquired.  When a company begins to dedicate resources to customer retention, it is important to remember that CAC only tracks expenses associated with acquiring new customers. 

Your efficiency will be vastly improved if you can fine tune your Chart of Accounts in a way that reflects your CAC calculation so it is automated.  Once your Chart of Accounts is fine-tuned, you will be able to do regular analysis to improve customer profitability, your LTV/CAC ratio and CAC pay-back period

Here’s a quick list of items that should not be included in your CAC (but may be) and you may need to set up accounts to handle these items.

10 Items NOT to include in SaaS CAC:

  • Fully loaded personnel costs for sales people who are focused on existing account management and renewals of existing customers
  • Sales Tools and Analytics for anyone not selling to new customers (CRM and any tools associated with the sales people selling to new customers SHOULD be included in CAC
  • User events and all associated expenses
  • Credit card and payment processing fees
  • Customer marketing campaigns
  • Marketing expenses such as corporate branding, logos, general awareness PR if not focused directly on prospects, etc.
  • Any current customer contests, recognition, give-aways, holiday gifts, etc.
  • Travel to visit or service current customers
  • User Guides and Customer Knowledgebase
  • Customer training

In our business benchmarking hundreds of SaaS companies, we have seen all of the above in CAC calculations. 

It Depends

Beyond the items that you can take out of CAC, there are a number of areas where a judgement has to be made about whether to include an item in CAC based on your structure.   Here’s a few to think about and where you may need to do some allocations or set up specific expense accounts.

Expenses that may not go into CAC, depending on your model, or may be divided between CAC and other categories, like COGs

  • Headcount for customer implementation work (generally part of COGs, but may depend on your business model). Work done for demos, trials and free product should go into CAC.
  • Sales engineers if they have other functions like doing customer support besides working with prospects
  • Website costs, assuming that the website is both for prospecting as well as for existing customers and overall branding

Calculate CAC Correctly to Optimize Top Line Growth

Successful SaaS businesses calculate the Cost of Customer Acquisition (CAC) correctly and use that CAC data to quantify and optimize their marketing funnel as well as their sales productivity.   CAC analysis gives SaaS vendors insights to improve top line growth.

Use SaaS CAC Calculations to Improve Customer Profitability

Further, another key metric that SaaS companies (and investors) use to calculate whether their business model is successful is the CAC payback period.  In the subscription model, customers do not pay for the product all up front, so the CAC payback period measures how long it will take to receive payment for the initial cost of acquiring the customer.  If it takes too long to recoup your new customer acquisition, you may run out of cash, or you increase the risk that you’ll lose the customer before getting paid back.  Too many customers like that and your business is a failure.

In addition, successful SaaS vendors target a CAC to LTV ratio of at least 3:  meaning for every dollar in customer acquisition, you get at least $3 in revenue back over the life of the customer.  Most investors are looking for something like a 3:1 payback on Sales and Marketing, or at least a clearly defined path to get there. 

OPEXEngine is a SaaS vendor benchmarking community.  We can provide you with peer benchmarks for CAC, LTV/CAC ratios, and CAC payback periods.  Call or contact us today to find out more.

Share this:

11 Comments

  1. Eric Ricketts

    Why would you not include the cost of marketing campaigns in the CAC?

    Similarly, if your spending on branding and awareness is fairly consistent over time, why would you not include at least a portion those costs in the CAC? I understand that those expenses are not targeted directly at customer acquisition, but it’s certainly the part of the intent of branding and awareness campaigns as well as customer retention.

    Reply
    • Lauren Kelley

      Hi, Eric,
      We were only excluding marketing campaigns aimed at existing customers. You are right, marketing campaigns aimed at prospects and to create new awareness in the market about your company, product or service would be considered applicable to CAC. Certainly in early stage companies, branding and most marketing campaigns would fall into CAC, but with larger companies with significant subscription revenue from existing customers, it makes sense to differentiate. Thanks for your questions and comments!

      Reply
  2. Chuck DeVita

    Lauren
    Thanks for this insightful post.
    Chuck DeVita

    Reply
    • Lauren Kelley

      Chuck, thanks, glad you found it useful.

      Reply
  3. Daniel Cohen

    Thanks for the insights

    Should related costs such as rent, recruitment of sales staff etc, be allocated and added to the CAC calculation?

    Reply
  4. Lauren Kelley

    Daniel, yes, typically you would include overhead like rent, etc., which is associated with the acquisition of new accounts. If you are a small company mostly focused on new accounts, then you’d include all the sales overhead. If you are a larger company, with a more complex sales organization and sales focusing on new accounts, plus renewals, and expansion, etc., then you’d allocate the portion of overhead associated with the new account reps. And in both cases, you’d also include the systems used by new account reps, like CRM and other sales support systems such as proposal or quote building systems. Ultimately, it is about tracking and managing your cost to acquire a new account – anything you spend to support that effort technically should be considered part of CAC.

    Reply
  5. Mary-Lynn

    If a SaaS business has a service team that onboards, tracks usage to ensure engagement and upsells as well as providing consultation and support all free, how much – if any – should be allocated to CAC?
    Also, to clarify the above question, should the overhead (rent, utilities, phones, etc) for just the sales and marketing people be part of the CAC?

    Reply
    • Lauren Kelley

      Yes, you should include overhead for the portion of sales and marketing that is focused on customer acquisition, usually new customer acquisition, in CAC. The first part of your question is talking about a services team, which is usually considered after sales, and part of the cost of revenue, not CAC.

      Some companies are able to split out sales and marketing for New customer acquisition from Renewals and from the cost to expand sales to existing customers. In a perfect world, you would be able to analyze the different expenses associated with acquiring new customers versus renewing customers, but it becomes difficult if you haven’t segmented your sales and marketing organization that way. Either way, you should include all overhead.

      Reply
  6. Jakob

    If expenses related to renewal are not considered CAC , how are they included in the calculation against Customer LifeCycle Value?

    Reply
  7. Nik

    Hi,

    our sales team is handling new customers and upsells. If we exclude the upsells in our cac calculation, the cac increases enormously as the costs are fully included. Do you have any suggestions how to solve the issue of calculating the cac with a sales team that is doing both?
    Thanks a lot in advance.

    Best,
    Nik

    Reply
  8. Lauren Kelley

    Hi, Nik,

    I just wrote another post on this very subject, see today’s blog. Basically, we see two different ways of calculating CAC from sales expense where reps are doing both new customer sales and existing customer sales. You can either take your total sales expense and divide the expense by the same percentage of revenue that you are earning from new customer ARR out of total ARR. We have also seen companies try to work out the portion of sales expense associated purely with new customer acquisition from the bottom up, ie., dividing the fully loaded cost of any sales personnel doing both types of sales, and then putting the rest of the sales org into either the “new customer” bucket or the “existing customer” bucket. The bottom line is that you want internally to have a really good understanding of your true cost of acquiring customers, so a bit of digging into the numbers is worth it. And happy to talk about it further if you want to give us a call, we have talked to hundreds of SaaS and software companies dealing with this issue. Thanks, Lauren

    Reply

Submit a Comment

Your email address will not be published. Required fields are marked *

WHAT OUR CLIENTS ARE SAYING

GET WEEKLY INSIGHTS + TRENDS ON SAAS METRICS

Why join our email list? Get important insights delivered straight to your inbox and receive access to reports before public release. We promise not to spam you or sell your name to anyone. You can always unsubscribe from our content at any time.


By submitting this form, you are consenting to receive marketing emails from: OPEXEngine.com, 282 Moody Street, Waltham, MA, 02453, http://www.opexengine.com. You can revoke your consent to receive emails at any time by using the SafeUnsubscribe® link, found at the bottom of every email. Emails are serviced by Constant Contact

WordPress Video Lightbox Plugin
Site Menu