How I calculate Customer Acquisition Costs (CAC)
As a CFO of a subscription-based software company, unit economics are very important to understand in this role. With these metrics, I can assess the true health of the business and the future trajectory of the business. Although there might be cash in the bank and revenues are increasing, we could be doing things that are actually hurting us in the long run.
You can download the Excel model I used in this example at the bottom of this post.
Not Used in Isolation
Customer Acquisition Cost (CAC) is a key metric to understand for any SaaS (software-as-a-service) or subscription-based business. In isolation, it does not mean much, but used in conjunction with CLTV (customer lifetime value), ARR (Annual Recurring Revenue), CAC/LTV ration, and ACS (Average Cost of Service), it is a powerful metric.
What is CAC and how do you calculate it?
CAC is the total sales and marketing expenses associated with acquiring one new customer.
It’s easy in theory to understand but your general ledger and headcount reporting system must have enough definition to segregate the required inputs for calculation. You should not take your sales and marketing expenses in total, because part of your sales team is focused on new business and part is focused on growing your existing customer base.
Often, and in my case, the sales cost center also includes account executives (selling into existing customer base), subject matter experts (SME’s), and sales support.
With co-mingled expenses in a cost center, I allocate “sales overhead” such as the SME’s and sales support based on the ratio of new and existing business reps. I also work with marketing to understand how much of their effort and expenses are focused on acquiring new customers.
How long is your sales cycle?
The length of your sales cycle has an impact on how you calculate CAC. Based on our product and target customer, our sales cycle is longer than smaller market items. To capture the correct timing of the marketing expense, I use marketing expenses from twelve months prior in my calculation. Why? With a longer sales cycle, the deal that closes today was most likely sourced from a marketing lead one year prior. So if we went big on trade shows a year ago, that should be factored into my CAC for the customer we just landed due to sales cycle length.
Number of new customers
% of Sales and Marketing Expense dedicated to new business
With the correct inputs, CAC is very easy to calculate. It is easy to be overwhelmed by all of the SaaS metrics but start step-by-step. Begin with CAC and then move on to ACS. With MRR you are well on your way to understanding payback periods, gross margins per customer, and customer lifetime value.
As always, I welcome your feedback and you can download the free Excel template below.
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