Calculating SaaS CAC – What NOT to Put In

April 26, 2019

Customer Acquisition Cost (CAC) is one of the key SaaS metrics to track and benchmark in your business.  By accurately calculating SaaS CAC and benchmarking it against peers and market leaders, companies can better allocate resources to improve growth and profitability.  And with accurate calculations, companies can identify the most profitable customer segments.  Yet, getting CAC right becomes increasingly complicated as companies grow and invest resources into both acquiring and retaining/delighting customers.

SaaS CAC is not as simple as dividing total Sales and Marketing expense into the number of new customers acquired, especially as companies have more and more existing customers.  When a company begins to dedicate resources to customer retention, it is important to remember that CAC only includes expenses associated with acquiring customers.One nuance that often comes up for SaaS growth companies is how to handle upsell and expansion cost.  The original SaaS business model premise was that acquiring customers can be expensive, even equal or greater than 1styear revenues, but that renewals would come at a much lower cost.  Companies have to use judgement in deciding whether to include early expansion and upsell costs into CAC or not.  If your sales model is to make a very small inroad into a customer with a small deal, and then relatively quickly upsell and expand to 2+ times your original sale, using the same sales team that acquired the customer, then those extended costs should probably be included.  However, if your upsell potential is relatively small and handled by your customer success or renewals team, then those costs probably should not be included.

Fine Tune Your Chart of Accounts to Differentiate Between Customer Acquisition and Customer Retention and Success

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.  In addition, you should be able to segment CAC by different customer cohorts to isolate the most profitable segments.Here’s a quick list of items that should not be included in your CAC.  You may need to set up accounts to separate these items.

10 Items NOT to Include when Calculating SaaS CAC:

  • Fully loaded personnel costs for sales and support headcount focused on existing account management and renewals of existing customers
  • 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), for example Customer Success or Customer Support applications
  • Credit card and payment processing fees
  • User events and associated expenses
  • Customer marketing campaigns
  • Customer contests, recognition, give-aways, holiday gifts, etc.
  • Travel to visit or service current customers
  • Customer Knowledgebase, particularly if it is behind a firewall
  • Costs and overhead for customer training programs and workshops
  • Costs and overhead for customer education programs, like online education

In our business benchmarking of 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 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 if implementation is done for a trial usage). 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

Calculating SaaS 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 and sales productivity.   CAC analysis gives SaaS vendors insights to improve top line growth and profitability.  Successful SaaS vendors target a CAC to a Customer Lifetime Value (CLV) 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, as well, are looking for a 3:1 payback on Sales and Marketing.OPEXEngine is a SaaS benchmarking platform and Finance community.  We can provide you with peer benchmarks for CAC, LTV/CAC ratios, and CAC payback periods for private and public companies.