Calculating Customer Acquisition Costs (CAC) Correctly
Most SaaS companies know that to run your business profitably, it is important to measure 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 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 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.
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 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.