Over the years, marketers have been able to launch highly-targeted campaigns and track consumers as they transition from initial leads to long-term customers. How can you evaluate the success or failure of your sales and marketing campaigns? Are these campaigns worth the money you are putting into them? In this article, we will cover how to measure the Customer Acquisition Cost and why it is important for your SaaS business.
What is the Consumer Acquisition Cost?
Customer Acquisition Cost (CAC) is a marketing metric used to determine the total cost of acquiring a customer in a subscription business. This metric is used most often to media spend, while focusing on the cost for the complete journey from first contact to customer.
How to Measure Your CAC Ratio?
The CAC numerator is expressed as an annualized number as most companies often analyze their company each year. SaaS contracts are typically run on an annual basis. Therefore, the CAC metric will match this time period.
To calculate your CAC ratio, divide the gross margin of the annualized new revenue that your company recorded during a given quarter by the sales and marketing costs:
([Gross Margin for Q2 – Gross Margin for Q1] x 4) / Sales & Marketing Expenses for Q2
In August, SaaS Inc. had $50,000 in revenue from monthly subscriptions. Management decides to spend $15,000 in sales and marketing expenses (pay-per-click, print ads, and sales representatives). Through these efforts, SaaS Inc. generated 100 new customers, all of which purchased a discounted annual subscription for $10 per month. To keep things simple, we will assume that SaaS Inc. pays $500 per month for unlimited hosting.
Aggregating all this information, we get the financial table below:
|August 2017||September 2017|
|Sales and Marketing|
|Pay Per Click||$5,000||$5,000|
|Sales Rep Salary||$6,000||$6,000|
|Total Sales and Marketing||$15,000||$15,000|
From the financial table above, we can see that SaaS Inc. had an increase in gross margin of $1,000 or $12,000 when annualized. Based on these numbers, the CAC ratio is 80%:
(Annualized Gross Margin of $12,000) / (Total Sales & Marketing Expenses of $15,000)
This means that the new 100 customers acquired will only recover 80% of the company’s sales and marketing effort in one year.
What the CAC Ratios means to you?
The CAC ratio metric is important to investors and companies. From an investor’s point of view, it helps analyze the scalability of your SaaS business. Investors can determine profitability by comparing how much money can be extracted from customers and the costs of extracting it.
On the other hand, your company’s marketing team is interested in this metric to measure the return on their advertising investments.
The CAC ratio is an important metric for understanding how long it will take you to recover your sales and marketing investments.