In the previous article, we discussed the fundamentals of unit economics and their importance for SaaS companies. Now, let's focus on two key metrics: Gross Profit and Customer Acquisition Cost (CAC).
Measuring Gross Profit
Gross profit is a crucial indicator of your SaaS business's financial health. It is calculated by subtracting the total cost of revenues from your revenue sources, presented in Annual Recurring Revenue(ARR). In our example, consider the following revenue sources (see Exhibit 1):
· Base Product ARR: $3,500K (Core recurring revenue generated from subscriptions.)
· Net Upsells after Downsells: $360K (Additional revenue from existing customers after accounting for downgrades.)
· Cross-sells: $450K (Revenue from selling additional products to existing customers.)
Total ARR therefore amounts to $4,310K.
It is essential to analyze what gross profit comprises. What are the main drivers? Do they align with the timing of revenue measurement? If they do not, the results and conclusions may be misleading.
In this example, the costs of revenue during this period (see Exhibit 4) comprise:
· Customer Success: $370K (Support services to ensure customers achieve their goals.)
· Storage and Compute: $340K (Costs for data storage and processing power.)
· Support: $300K (Expenses related to customer assistance and issue resolution.)
· Launch Costs: $180K (Initial expenses associated with bringing a product to market.)
Together, these costs total $1,190K. Thus, gross profit is calculated as follows:
Gross Profit = Total ARR ($4,310K) - Cost of Revenues($1,190K) = $3,120K.
Next, let's determine the gross profit per user. In our example, total gross profit for the period was $3,120K. If the number of new users in that period (e.g., one year) was 10K, then the gross profit per user is $312 (see Exhibit 2).
Calculate Customer Acquisition Cost (CAC)
Accurate calculation of Customer Acquisition Cost (CAC) is essential for understanding your investment in acquiring new customers. This metric serves as a vital benchmark for evaluating marketing effectiveness. CAC should include the following components (see Exhibit 3):
· Sales Salaries: Total expenses related to onboarding and training new sales team members, which in this case is $630K.
· Commissions: Costs directly tied to closed deals, typically incurred after the sale, amounting to $1,120K in this example.
· Marketing Expenses: Costs associated with customer outreach efforts, totaling $480K.
· Sales Recruitment: Costs associated with hiring new sales personnel and Sales Churn: Expenses related to replacing departing sales team members, totaling $130K.
· Lead-to-Deal Expenses: Additional costs incurred in converting leads into paying customers, which amounts to $100K in this instance.
In this example, the total CAC sums up to $2,460K. While these components are primary, other specific items may need to be considered based on your business context.
Thus, if the total CAC for a given period is $2,460Kand you acquire 10K new users during that time, your CAC per user would be $246 (see Exhibit 4). This figure illustrates how much you're willing to invest to acquire a new user, which is critical for evaluating your sales strategies and budget allocations.
CAC is a vital yet often misunderstood metric in the SaaS space. Many CEOs underestimate the complexities involved, especially in managing time allocation. It’s crucial to consider the duration it takes for leads to convert into paying customers, as this can complicate CAC calculations.
As discussed in my article, "Simplifying CAC for Startup Success," employing a clear and methodical approach to calculating CAC ensures that your marketing and sales strategies align with realistic objectives, helping you avoid costly errors.
