Customer Acquisition Cost (CAC) has become an essential metric in every SaaS company. It is an important metric because it allows companies to understand how much they spend to acquire new customers and whether or not that spending is sustainable.
If you open a general standard CAC formula, you find the following one:
For example, if a company spent $100,000 on sales and marketing and acquired 200 new customers, its CAC would be $500.
Seems straightforward, Right? But here's the thing - in order to present CAC accurately, it is important to clean CAC by removing any unnecessary “noises” that do not contribute directly to acquiring new customers. Otherwise, it's a recipe for mess-up or GIGO (garbage in = garbage out).
- Separation by Revenue Stream and Channel - it is crucial to calculate CAC for each individual revenue stream and sales channel. In cases where multiple revenue streams are present (e.g. different products or solutions), separated CAC calculations should be performed for each. Additionally, for businesses with diverse go-to-market approaches such as direct sales vs. channel sales, it is essential to consider that each approach may have varying sales cycle durations, sales compensation structures, and levels of profitability. As a result, it is recommended to calculate a separate CAC for each approach.
- Number of New Customers Acquired - new customers in the future will come from what we're doing now to market our business. To track the success of these efforts, we count new customers after the estimated time it takes for a lead to become a customer. For example, if it usually takes 6 months to turn a lead into a customer, we'll measure it after 6 months. This refers to the total number of new customers that are part of the relevant revenue stream, within a specified time period. That will ensure an “apples-to-apples” analysis.
- Sales & Marketing Costs – this includes all expenses related to your marketing and sales efforts, like ads, events, creating content, generating leads, and more. Verify that the costs’ classification is correct. Remember that misclassification = bad data.
- Sales Commission - for an accurate comparison, commission payments should only include payments made to sales representatives or partners after a deal has been closed for each new customer (see item 2 above).
- Indirect Costs - this includes any other indirect costs incurred, such as software, hardware, cloud services, and overhead (i.e. office, rent, and utilities) that can be associated with acquiring a new customer.
The preferred CAC formula relates to a specific revenue stream or sales channel, provides a more accurate representation of the actual cost of acquiring a customer, and can be used to compare the efficiency of different acquisition channels or strategies.
Example:
Sales and Marketing (including commission) for the period - $1,550K
Commission in this period (paid for past deals) - $180K
Commission for this period (paid in the future) -$240K
Indirect Costs - $80K
Number of new Customers (in this revenue stream) - 120
This kind of CAC analysis for each revenue stream and sales channel brings to a Portfolio Discussion. Your company can now identify areas of improvement & efficiency, determine the most cost-effective marketing approach and allocate resources based on profitability, and competitive advantages.
