Don’t Do This When Allocating Your CAC Expense | SaaS Metrics School | CAC Expense
Welcome to another edition of SaaS Metrics School! I’m Ben Murray, The SaaS CFO, and today we’re diving into the critical topic of Customer Acquisition Cost (CAC) allocation in the SaaS industry. Many SaaS founders and CFOs struggle with correctly allocating CAC expenses between new customer acquisition and existing customer expansion. In this video, I’ll break down why accurate CAC allocation is essential for clear insights into your SaaS metrics, such as CAC payback period, LTV to CAC ratio, and even cost of ARR (Annual Recurring Revenue).
Why CAC Allocation Matters
Correctly attributing sales and marketing expenses to either new or existing customer acquisition is crucial in SaaS. Traditionally, CAC is associated with costs spent on acquiring new customers, but as a SaaS business grows, more emphasis often shifts toward customer expansion and retention. If your CAC allocation is inaccurate, it can skew your efficiency metrics, impacting critical KPIs across your SaaS sales and marketing teams. When you misallocate expenses, you risk underestimating or overestimating your LTV/CAC ratio, which then misguides your decisions on marketing spend, customer retention strategies, and SaaS business growth.
How to Allocate CAC Between New and Existing Customers
1. Sales Team Allocation
For your sales team, the most effective method is to allocate CAC expenses based on the roles of sales reps. Ideally, if your sales structure is separated into teams for new customer acquisition (hunters) and existing customer expansion (farmers), you can allocate expenses directly by team. But what if your sales reps are hybrids, working across both new and existing customers? This common setup requires a bit more analysis.
One common misstep is using your sales pipeline to determine allocation. However, using the new vs. existing pipeline ratio can distort results. For instance, if your new pipeline shows a much higher value, but your sales team for new business is relatively small, the allocation won’t reflect reality. In contrast, a larger team generating a lower pipeline would indicate ineffective resource utilization.
2. Marketing Allocation
The allocation for marketing expenses requires close communication with your marketing leader. When marketing doesn’t have dedicated resources for new and existing customers, one solution is to examine your lead flow. Reviewing new and existing lead flows allows you to see where resources are concentrated. Using lead flow as a proxy for the allocation gives a clearer picture of how CAC expenses are truly spread.
3. Alternative Methods
Other alternatives include asking your sales team directly about time spent on new vs. existing accounts, though this method is more subjective and may lack precision. For a more objective approach, use lead pipeline ratios rather than opportunity pipeline data. This helps estimate where sales team time and marketing resources are actually allocated without skewing the CAC allocation ratio.
Why Accurate CAC Allocation is Essential
When CAC expenses are correctly allocated, your SaaS metrics become reliable indicators of performance. For example, accurate allocation impacts the following KPIs:
-CAC Payback Period: Know how long it takes to recover CAC expenses.
-LTV to CAC Ratio: Ensure accurate calculations by attributing costs correctly.
-Sales Efficiency Metrics: Track and benchmark performance across teams and resource allocation.
-Cost of ARR for New vs. Existing Customers: Know your true cost of growth, whether it’s new or expansion ARR.
Each of these metrics directly affects your SaaS sales strategy and broader financial modeling for SaaS. Misallocating CAC can disrupt your entire SaaS metrics framework, resulting in misguided decisions and budget mismanagement.
Summary and Next Steps
By understanding CAC allocation in-depth, you’ll be equipped to maintain an accurate SaaS financial model. Remember, your efficiency metrics—especially for sales and marketing—depend on having a solid foundation for CAC allocation. Watch the full video to learn more about practical approaches to CAC allocation and SaaS metrics optimization. And if you find this content valuable, please consider leaving a five-star rating and review!
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