Estimating Customer Acquisition Cost (CAC) in B2B SaaS

Customer Acquisition Cost (CAC) is an important metric in the SaaS industry.  CAC is tied at the hip with Lifetime Value (LTV) that we discussed in a previous post.  The simplistic formula for estimating CAC is:

{Fully loaded (including Headcount) Sales and Marketing Expenses for the quarter} / {Number of new customers in that quarter}

For example, if the full loaded Sales and Marketing Expenses in the quarter are $10 Million and the number of new customers in the quarter is 500, CAC is $10,000,000 / 500 = $20,000

The above formula works reasonably well for SAAS companies with short sales cycles – say under 90 days from lead generation to win.  These tend to be SMB-focused SAAS companies.

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For SAAS companies with longer lifecycles, the above formula is less accurate.  As an example, for one of our clients, the average Lead to Opportunity duration was 4 months and Opportunity to Win was 8 months, resulting in 12-month sales cycle.  To calculate CAC more accurately for these cases, we need a refined approach.

This refined approach requires estimation of quarterly conversion ratio from New Opportunity to Win.  This requires quarterly summary KPIs that provides the aggregate number of New Opportunities and Wins.  The ratio of New Wins to New Opportunity full quarters tend to be relatively stable, say between 20% to 30%.

Once the above ratio is estimated, use the following formula for CAC:

{Fully loaded (including Headcount) Sales and Marketing Expenses for the quarter} / {Number of new Opportunities created in that quarter * Quarterly Opp to Win ratio}

As an example, let us say the fully loaded Sales and Marketing expenses in quarter is $10 Million, and the number of New Opportunities created in the quarter is 1,000 and the full quarter conversion ratio is 20%, CAC is estimated as: $10,000,000 / (1000 * 20%) = $50,000

Now we have two different methodologies for estimating CAC based on the type of company (one with a short sales cycle versus with a long sales cycle), there is further potential for refinement by doing separate estimations by geography (example: North America, Europe, Asia Pacific).

How does LTR and CAC should compare? The current informal benchmark is that the ratio of LTR to CAC should be 3.0 or higher.

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Posted by HireJar Staff

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