How COVID-19 has affected Customer Acquisition Cost Calculations
A good business practice every year is to review your KPI calculations and adjust for any changes. Right now, this is especially true because of all the changes every company undertook due to the pandemic, especially moving to remote work and contactless selling to customers. This post focuses on Customer Acquisition Cost (CAC) calculations: what should be in it and what should NOT be in it, and how the pandemic may have changed your calculation.
Items to Review for Customer Acquisition Cost Calculation
Most vendors during the pandemic shifted resources to ensure customer retention. You should assess how that may have changed any of your tracking systems to separate CAC expenses from customer retention expenses. Here’s a brief list of items to review:
- Changes to the definition of a Paid Customer. Did you extend freemium offers to potential customers to acquire them during the pandemic? This affects both the denominator and numerator of the CAC equation, as the denominator should be the number of new paid customers (not freemium customers). Expenses associated with freemium acquisition are part of the numerator as a lead gen expense. Were there other expenses that went into providing new freemium services to prospects or maybe to keep lapsing customers warm?
- Changes to the time period between Lead Generation and Customer Acquisition. This may have extended (or shortened) in 2020.
- New systems or tools used for contactless sales should be added to CAC, such as sales usage of Zoom or any other sales tools for contactless sales, such as investments in videos for prospecting, etc.
- All sales and marketing systems and tools associated with new customer acquisition should be reviewed. If it isn’t possible to segment between new customer acquisition and existing customer tools, then a portion of the total can be allocated to CAC. This is often done based on the percentage difference between new customer revenue and renewal/expansion revenue.
- Any new marketing content production and creative costs aimed at acquiring leads and new customers? Did you revise marketing pitches and tools to deal with the new environment?
- Fully loaded salaries and benefits for sales and marketing personnel associated with new customer acquisition. Make sure you include the cost of overhead: Did you provide additional dollars for sales and marketing people working from home and not in the office anymore? If Sales, for example, has responsibility for both new customers AND renewals and up-sells (often the case in smaller companies), then a percentage of the expense can be allocated to new customer acquisition, typically based on the percentage difference between new customers revenue and renewal/expansion revenue.
- Large irregular expenses relating to one-time events or events that happen once every few years, e.g., large trade shows or marketing events that will spike CAC in a particular year can be normalized based on the time frame that they benefit.
10 Items NOT to Include in SaaS Customer Acquisition Cost Calculations:
Here’s a brief list of items that should not be included in your CAC (but could already be), and you may need to set up accounts to handle these items separately.
- Fully loaded personnel costs for salespeople 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 salespeople 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, giveaways, holiday gifts, etc.
- Travel to visit or service current customers.
- User guides and customer knowledge base.
- Customer training.
The pandemic changed a lot of the ways that we are doing business, and that may have affected your CAC. Make sure your customer acquisition cost calculation is up to date and will be accurate through 2021.