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The Customer Acquisition Cost (CAC) Ratio: Another Subtle SaaS Metric

Dave Kellogg
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Examining the CAC Ratio

  • The first rule of metrics is to understand them before making decisions
  • One metric should measure one item. To measure the business, create metrics that work together 
  • CAC ratio determines the cost associated with acquiring a customer in a subscription business.

Consider 6 key issues when calculating CAC:

  1. Months vs. years
    1. Is MRR or ARR more relevant?
  2. Customers vs. dollars
    1. A SaaS company may run 3 business models in parallel - velocity, enterprise, freemium 
    2. CAC analysis should be segmented with no averages lumping together categories 
    3. Optimal CAC: an average cost to acquire 1 dollar of ARR
  3. Revenue on top vs. bottom
    1. Does revenue make more sense in the numerator or the denominator?
    2. Bottom line: the CAC should be the amount of S&M spent to acquire a dollar of ARR
  4. Revenue vs. gross margin
    1. Do not blend SaaS operating efficiency with customer acquisition efficiency into 1 metric - they are driven by different levers
  5. The cost of customer success
    1. The mission of customer success is to maximize renewals, handle upsell/cross-sell 
    2. The question with respect to CAC is what to do with customer success costs
    3. Recommended solution: exclude customer success from CAC
  6. Time periods of S&M
    1. Many SAAS companies’ CAC definitions assume a 90-day sales cycle for 2 reasons:
      1. Offsetting errors 
      2. Comparability 
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