I run a SaaS company based on a free open source CMS that we developed internally: LocomotiveCMS. For a while, everything was free and open source. 18 months ago we decided to turn it into a profitable company so we launched our first offer: LocomotiveHosting that provides hosting for your LocomotiveCMS websites, as well as free upgrades, daily backup and priority support for $19/month/website. I understand the importance of being able to understand my key metrics such as CAC but I just don't know how to calculate CAC accurately. We don't spend money on Adwords or on SEO which are often the examples that you'll see in blog articles talking about CAC for SaaS. And yet, it would be ridiculous to say that our CAC is $0. We do however have a full time employee working on content marketing. So among the following tasks (which are the ones that take most of our time), what should go into our CAC ? - development of the open source product, LocomotiveCMS - development of LocomotiveHosting, our paid offer - support to LocomotiveCMS users - support to LocomotiveHosting users - writing documentation and tutorials for LocomotiveCMS users. - writing guides, blog posts, sending newsletters to both LocomotiveCMS users and LocomotiveHosting customers - copywriting for our website - improving on-boarding: videos, demo websites, setting up autoresponders with vero or customer.io.... Obvioulsy, if many of the tasks mentioned above go into CAC, our CAC will soar to hundreds of dollars. Thanks a lot for your help
At WP Engine, everything in marketing and sales is included in CAC. Salaries, commissions, coupons, direct advert spend (which you're saying you don't yet have), fees, travel and other costs associated with conferences, etc..
My advice is to err on the side of putting too much in CAC, because that helps you honestly understand the costs. Ignoring some costs just because they don't scale with company size or marginal new customers doesn't make sense to me, it simply means that certain components of your CAC you expect to get more efficient over time. Indeed, they had better! So measure it, instead of ignoring it.
You also might find that some of those direct-spend channels are not as inefficient as they seem compared to things like SEO efforts. Or the reverse! All good things to explore of course.
I'll also note that at $19/mo in the crowded space of CMS offerings you will find that very few channels will be efficient compared to the revenue you're generating. It sounds like you know that, and are dealing with it with "scalable" efforts like content marketing, however again you should be ruthless in understanding how those costs are really translating into orders and whether that's a financially sensible total strategy.
Answered 9 years ago
Here's the breakout I would use:
Acquisition: Any work or activity focused on acquiring visitors to the site should be equated as an expense towards CAC. This includes work done by your marketing person + product development focused on your funnel and conversion points.
$40,000/year broken into small timeframes that even if performing at a loss in early months scale to profitability over time. This ties performance goals directly to the role of the employee.
Activation: Once on site, work done to activate these visitors is core product development.
Revenue: If you have a sales guy emailing leads and following up to explain benefits + convert to PU's this should contribute to CAC. The idea here is to use a direct email drip from a person and automate aspects of your drip as your acquisition funnel grows and becomes too cumbersome to manage all the individual parts.
Retention: Email triggers on auto renews, direct reach-out and support on existing customers is a direct overhead expense (cost of doing business) not CAC.
Referrals: Implementing some sort of viral hook for existing customers to refer their colleagues/friends/family is in my mind core product development and should be a value add to your acquisition strategy that grows over time.
Answered 9 years ago
The two answers above are great. I would just add that in order for CAC to be useful you also need a reasonably accurate Lifetime Value (LTV) number. It's very important to know if your costs are being amortized over 3 months of revenue or 18 months. I realize you are early in the process of growing this product but its important to make your best guess here, put a stake in the ground with a number and then optimize over time.
Having a LTV number also helps you to decide when to focus on your acquisition costs vs retention costs. Often its not realistic to work on optimizing both at the same time. Good luck!
Answered 9 years ago
The CAC can be calculated by simply dividing all the costs spent on acquiring more customers (marketing expenses) by the number of customers acquired in the period the money was spent. For example, if a company spent $100 on marketing in a year and acquired 100 customers in the same year, their CAC is $1.00.
I will be happy to help if you need more information. Feel free to setup a call.
CEO of StartupLanes
Answered 5 years ago
Customer Acquisition Cost (CAC) measures the cost of converting a potential lead into a customer. Businesses will use this metric to determine their profitability because it compares the amount of money, they spend on attracting customers against the number of customers they gained.
We can calculate customer acquisition cost by using this formula: Customer Acquisition Cost = Cost of Sales and Marketing divided by the Number of New Customers Acquired.
If you are not sure of what your "cost of sales and marketing" may be, consider the following expenses for this metric.
a. Ad Spend: Ad spend is the money you are spending on advertisement. For some businesses, advertising is a great way to attract new customers, but it is important to invest in campaigns that will resonate with your target audience. If you're not sure whether you're getting a good return on a marketing campaign, you can calculate its value by dividing the revenue that's produced by advertisement by the amount of money you spent on that campaign.
b. Employee Salaries: Great employees are always worth the investment. So, pay close attention to how you approach this cost if you feel it is too high. There may be alternative options for reducing money spent on salaries, other than issuing pay cuts or layoffs. For example, chatbots and marketing automation can supplement your team's workflow and improve your company's overall productivity.
c. Creative Costs: Creative costs are what you spend on creating content. This could be money spent on acquiring talent to promote your company or it could be what you spent on lunch for your team meeting. All these costs factor into content production.
d. Technical Costs: Technical costs refer to the technology that your marketing and sales team use. For example, if you purchased a reporting tool that tracks the progress of your open deals, that would be a technical cost.
e. Publishing Costs: Publishing costs are what is spent to release your marketing campaign to the public. This could be money spent on TV airtime, paid social media ads, or a spot in a newspaper or magazine.
f. Production Costs: Production costs are the costs associated with physically creating content. If you are making a video, you need to buy a camera, create a set, edit the video, etc. These costs add up, especially if you are paying a third-party to produce your content.
g. Inventory Upkeep: Even if you're a SaaS business, you'll have to spend money on maintaining and upkeeping your products. If you are providing software, this is the money you spend on updates and patches to the user experience.
To calculate customer acquisition cost, the first step is to determine the time period that you're evaluating for (month, quarter, year). This will help you narrow down the scope of your data. Then, add together your total marketing and sales expenses and divide that total by the number of new customers acquired during the time period. The result value should be your company's estimated cost of acquiring a new customer.
For example, let us say your company spends $500K on sales and $300K on marketing. Additionally, your company generated 800 new customers during the last fiscal quarter. If we were to calculate the CAC for your business, the cost to acquire a customer for that quarter would be $1K ((500K + 300K)/800= 1K). Once you have calculated CAC for your company, you can compare this value against other key business metrics. By doing so, you will uncover important insights about your marketing, sales, and customer service campaigns.
Besides if you do have any questions give me a call: https://clarity.fm/joy-brotonath
Answered 2 years ago