What Should be Included in a CAC Calculation?
When calculating your customer acquisition costs, it can be unclear exactly what this means. This is because different companies have different CAC calculations based upon their business model. Meaning, there is not necessarily a ‘one size fits all’ solution. To demonstrate this point, we can look at CPA or Cost Per Acquisition, measures as an alternative. No matter the business calculating the cost per trial or cost per lead, is always the same.
Before we can examine in more detail what should be included in a CAC calculation, we must first examine what a CAC calculation is.
CAC is the calculation for determining the Cost of Acquiring a Customer – this relates specifically to who’s buying your product or service, NOT starting a trial or joining your mailing list.
Now that we have defined what CAC is, we can look a little closer at how it is calculated.
Calculating your Customer Acquisition Cost
Calculating CAC is defined as the total cost of marketing + total cost of sales divided by the total number of deals closed.
This may not help us in answering the question of “What should be included in a CAC calculation” as there are many costs associated with marketing and sales, where it is not clear if they should be included. For example, if you pay for Hubspot Sales Professional, should you include this cost?
To answer this question more completely, let’s go a little deeper.
To start, we must have a complete list of all costs that the business must bear. Not just the direct costs, such as wages and software to support your team but indirect costs, such as office rent and hardware costs for phones and laptops etc.
Once you have a full list, they must be segmented into the appropriate categories. For example, you may wish to include tools likes Salesforce and Hubspot Sales Professional in sales and office rent, under operational costs.
Once you have your list categorised, it is easy for you to see what costs are required to acquire each customer. If you have only every tracked cost per lead or cost per demo in the past, you might be surprised at what the ‘true cost per acquisition’ is.
One area that we have not touched on in great detail is operational costs. Do you or should you include this in your CAC. Operational costs like any other expense must be covered by the business but including them in your CAC is subjective and you can make an argument for answering yes or no.
As no is a simpler answer we will start there. By saying no you must make it clear that you are not including operational costs in your CAC and that they can be viewed as a separate line item in any financial reporting.
So long as this is clear and the separate costs are visible to the relevant parties who are interested then no problems are likely to arise.
Alternatively, you might choose to include your operational costs into your CAC as they must be paid and will be paid by the customers you have acquired. As such you may argue it only makes sense to include these costs as without them you may not have access to the goods and services needed in order to close these customers.
Again it is important that you make it clear if you have chosen to include the operational costs and shared this information with the relevant individuals in your organisastion.
To include the operational costs into your CAC calculation simply add them to the marketing and sales costs before dividing this by the total number of deals closed.
No two businesses will be completely alike in their CAC calculations but what is important is that you have visibility into your costs and how they are categorised. By doing so you can make informed decisions about how to calculate your CAC and explain your thinking to those who are interested.
To see how you can leverage CAC and use it to make actionable decisions in your business you may enjoy this article on Why is LTV/CAC Important