Does CAC Include Salaries?
When calculating your “Customer Acquisition Costs” or CAC, a common question is “Does CAC include salaries?” The short answer to the question is ‘yes,’ but we must delve deeper into the question to answer it completely, as there are nuances to the answer.
Whose salaries are included, how much of their salary and how many months of their salary do we include?
To answer these questions in full, we must start by looking at what your CAC is.
Calculating Acquisition Costs
A customer acquisition cost or CAC is a monetary value for all of the marketing and sales costs to acquire a customer. This includes salaries of all individuals associated with marketing and sales activities to close a customer.
The equation for CAC is often defined as the [total cost of marketing + total cost of sales divided by the total number of deals closed.]
This is quite straightforward if you have a sales cycle that lasts only one month. You simply apply the equation each month and calculate your CAC.
It is less straightforward when your sales cycle lasts 2 or more months, as your sales reps will be spending time working deals at different stages month to month, meaning the basic CAC calculation needs to be adjusted.
Including Salaries In Your CAC
Where you have a multi-month sales cycle, you will need to only apply a certain percentage of sales wages to the CAC calculation. This may seem unusual as we want to include all of our marketing costs and all of ours sales costs.
Although, we should rephrase that slightly to all of our sales costs associated with a specific lead or leads.
The easiest way to demonstrate this is with an example.
Let’s imagine we are calculating the CAC for a company with a 2-month sales cycle, we pay our sales representative $2000 per month, we close 20% of the leads passed to sales from marketing and each month marketing generates 100 leads, at a cost of $1000.
In month one we have 100 leads that are passed to your sales rep and they begin trying to close them.
In month two we have another 100 leads that are passed to your sales rep and they begin trying to close those leads too.
In this simple scenario, by the time we get to month two… your sales rep is working leads from both months one and two.
Assuming we have a two-month sales cycle and leads from month one begin to close in the second month how much time and therefore cost do we associate with the closed deals and how much time do we associate to the new leads that were added in month two?
The way in which we answer this question is to set a limit on the number of leads each sales rep can manage at one time. To keep the numbers simple, let’s say each sales rep is allowed a maximum of 200 leads at any given time.
In our scenario, that means all of the leads are going to one sales rep. By making this simple addition of defining and tracking how many leads each sales rep has, we can clearly calculate the CAC.
To calculate the CAC of leads that were given to sales from marketing in month 1 but closed in month two due to the two-month sales cycle, we can do the following calculation:
$1000 generating 100 leads
$2000 paid to the rep in month one where they are managing the 100 leads
$2000 paid to the rep in month two but we divide this by the total number of leads being managed (200) giving us a monthly cost per lead and multiply this by the leads being worked from month one (100) giving a cost of $1000 for the first 100 leads and $1000 for the second 100 leads.
Therefore, our total CAC for the leads generated in month one is: $1000 + $2000 + $1000 divided by the total number of deals closed from our first 100 leads, which was 20 based on a 20% close rate.
Giving us a total acquisition cost of $200 per customer.
Calculating CAC can be a confusing process for many, especially when multi-month sales cycles are involved. By explaining how to include different levels of salary into your calculation I hope this article has provided some clarity for your own acquisition calculations.
To continue your learning, see Why is LTV/CAC Important when using data to analyse your business health.