Ben Murray Gives a CAC Masterclass
Ben Murray, The SaaS CFO, joins to discuss all-things customer acquisition cost. They discuss the importance of fully-burdened CAC calculations, the concept of a CAC profile, and how to get strategic insights from analyzing acquisition costs.
Subscribe to the podcast
Ben Murray Gives a CAC Masterclass
SaaS companies have a lot of different efficiency metrics. And customer acquisition cost — the amount of money a company spends to get a new customer — is a ubiquitous SaaS metric.
How can SaaS companies achieve financial stability and transparency and calculate CAC correctly? What if we have basic calculations and our company matures? How are other metrics involved in the company’s performance?
In this episode of The Role Forward, Joe Michalowski welcomes Ben Murray, the founder of The SaaS CFO. Joe and Ben get into all-things customer acquisition cost (CAC) for SaaS companies. They discuss the importance of having fully burdened cost centers to calculate CAC and the challenges of calculating other metrics in a CAC profile, like LTV/CAC, CAC payback period, and CAC ratio.
Watch the Full Video
Ben Murray is an experienced finance leader with 20+ years working at companies ranging from small, private tech companies to multi-billion dollar public companies. As The SaaS CFO, he offers fractional CFO services, coaching, and courses specifically for SaaS organizations. He holds a CPA license from Tennessee and degrees from both the University of Colorado and the University of Iowa
- CAC is only as valuable as the context you put it in. Build out your CAC profile for a complete understanding.
- Having fully-burdened cost centers is critical to accurate CAC calculations.
- Your CAC calculations should evolve as your company matures.
Episode Highlights from Ben Murray
15:50 — Getting LTV/CAC Right
“I think businesses that have a small price point and high volume self-service live and die by LTV to CAC because they’re putting hundreds of thousands of dollars into paid ads to acquire customers and retention is pretty set. They know how long customers are staying with them, so they’re constantly playing with the CAC and the LTV of that customer. I’d say for mid-market enterprises, we’re calculating and looking at that range, but we’re not over-rotating on it. Again, you do need to live and die by it because you’re spending so much on paid acquisition.”
17:40 – How to Think About CAC Payback Period
“We have to think about CAC at a high level. We’re investing in CAC, and it has to pay back over time. So I view CAC like debt. We put down this money, and now it’s being paid back over time. And that’s why they say, ‘Churn is a SaaS killer,’ because if you have poor retention, you’re putting all this money into CAC, and you’re losing customers sometimes before they pay back CAC. So now you’re relying on new customers to fund both — the previous CAC and the CAC for that customer. And that’s where it just snowballs.
I like to frame it up as debt so that even if the customer churns, you still have to pay it back. Then also, CAC ties up working capital. So, if you have an inefficient go-to-market engine, you’re throwing all this money into the sales and marketing machine. If it’s not being paid back efficiently, there’s an opportunity cost to that capital. So getting into the economics of that and thinking about debt that ties up working capital, we have to be very careful with it.”
21:50 — Calculating CAC Ratio
“You can only attach so much detail in your general ledger, your accounting system, the expansion CAC ratio, and your cost of ARR, where you’re just focused on the net new error that you’re bringing into your business from existing customers. How much is that costing in sales and marketing dollars that are just dedicated towards expansion? And sometimes, it can be objective if we have a new business rep team and account management team for existing customers. I use that ratio then to split sales costs. So, I try to be as objective as possible.
Marketing is harder. Usually, I have to talk to the marketing leader. ‘Where are you spending your time? Let’s look at your expenses. Is it easy to identify expenses that are new versus existing?’ And then, after that, you just have to go on a subjective measure. Usually, I see a 70:30 split — 70% new, 30% existing — and you have to go with that split. And again, when I do that, I make sure that’s footnoted in my board deck or my package because that’s a really important assumption. […]
Set up your chart of accounts. You’ve got good coding for marketing expenses by your major acquisition channels. And then, on the sales side, is there an objective measure where you can split that? And sometimes you have to fall back — maybe we just have to guess, but make sure you just put that assumption out there, so people know that.”
[00:00:00] Ben Murray: I view CAC like debt, you know. So, we put down this money, and now it’s being paid back over time. And that’s why “churn is a SaaS killer.”
[00:00:10] Because if you have poor retention, you’re putting all this money into CAC. You’re losing customers sometimes before they pay back CAC. Now you’re relying on new customers to fund both those previous and the CAC for that customer.
Ben Murray Introduction
[00:00:46] Joe Michalowski: Hello and welcome to another episode of The Roll Forward podcast. My name is Joe Michalowski, and this episode is brought to you by Mosaic, a strategic finance platform that transforms the way business gets done. And today, I’m very excited to have our guest Ben Murray, otherwise known as the SaaS CFO on, been a leading voice in the SaaS finance space for, like, 10+ years.
[00:01:05] If you work in this space, you probably know who he is. So, Ben, just want to say thank you so much for joining me today.
[00:01:11] Ben Murray: Hi, Joe. Yeah. Great being here. Thanks for having me on.
[00:01:13] Joe Michalowski: Awesome. So, I mean, you know, maybe an other, unlike some of the other guests we’ve had on
[00:01:18] maybe this isn’t as necessary, but I’m going to ask you the same thing we usually ask people, and that’s, like, before we start, do you mind giving us the quick background on yourself, the work you’re doing at the SaaS CFO, kind of how that started?
[00:01:28] Ben Murray: Sure. Yep. I’m a CFO by trade, so of course, been in finance and accounting my entire career in the airline industry. And then, I got into the software industry back in the on-premise, perpetual maintenance days. Now operate a site that I started maybe seven years ago, thesaascfo.com. Where sharing my knowledge on SaaS, finance metrics, accounting, a bunch of templates, forecast models. So, came up through the ranks of FP&A, became a SaaS CFO
[00:01:51] and founder, in private equity-backed businesses. And now, about 12 months ago, I started my own services offering, you know, fractional coaching and then also teach courses on SaaS metrics.
[00:02:02] Joe Michalowski: Nice. The airline part I did not know. That’s really interesting. Maybe a story for another day ’cause I know we’ve got stuff to dig into, but, um, you know, I’d love to get that background, and congrats on doing the services now. I didn’t realize that you were doing the fractional CFO but.
[00:02:15] So, that’s really cool too. Awesome. Well, try to, you know, when we have people on the podcast dig into like a, a more specific topic than just asking you more questions about your career. And so, when we have, we’re going to have you on, I went on thesaascfo.com, and I checked out the website, the last couple of articles were about customer acquisition costs. And so, I thought we could dive into that and do like a CAC masterclass, if you will, as we chat today. So, one thing I saw that you wrote about that I haven’t seen anywhere else when I read about these things is the idea of, like, a CAC profile. I just haven’t seen that term before.
Explaining CAC Profile
[00:02:44] So, can you explain what you mean by CAC profile and like why that’s an important way to look at it?
[00:02:50] Ben Murray: Sure. Right. We know CAC is a ubiquitous SaaS metrics. So, thinking about it, there are a lot of different sales and marketing efficiency metrics. But I look at all those in context because metrics in isolation don’t meet, mean much, you know, we need the metrics around it, that context, to really understand that full picture.
[00:03:06] And that’s where I came up “Well, what about how do I look as a CFO in my experience, how do I look at CAC and sales and marketing efficiency metrics?” And really, you’re creating a profile for the business around CAC, and a lot of different metrics make that up. So, again, it’s providing a lot of context looking at all the sales and marketing efficiency metrics and trying to interpret
[00:03:26] “What story is that telling for our business?”
[00:03:29] Joe Michalowski: Love that. It’s, ties in really well with, with the work we do at Mosaic, it’s kind of the whole spiel for our company. Is that, like, you don’t just get the one metric spit out, like here’s your customer acquisition cost, but you get it in full context, so completely on board with you there. But I feel like you come to that conclusion based on some experience in maybe miscalculations with CAC or what ways people have gotten it wrong.
[00:03:53] So, I’m curious, like in all of your experience with all these different SAS businesses, what are some common ways that people get their CAC calculations wrong?
[00:04:03] Ben Murray: Yeah, this is one of those things with, with SaaS metrics where you think, “Oh, CAC, simple concept.” Say sales and marketing expense divided by new customers. One, super simple but, you know, some things that always come up with calculating CAC correctly or incorrectly is fully burdened costs for sales and marketing.
[00:04:19] For example, wages, taxes, benefits. You know, sometimes people are just posting wages to sales and marketing cost centers have benefits, say coded and taxes down in GNA. So, the big thing is the fundamentals of CAC is just having fully burdened cost centers. So, all the wages, taxes, benefits, travel, paid ads, swag, whatever it is, all those expenses attributed back to sales and marketing.
[00:04:44] So, that’s one big thing is just making sure it’s a fully burdened cost centers for sales and marketing so we can get the CAC calculation correct. Then, as we move along, sales cycle becomes a really big deal, you know? So, it’s like, “What time period are we measuring for CAC? Is it one month? Is it three? Is it six? Is it twelve?”
[00:05:02] And we have to align that to our sales cycle to make the CAC calculation and other sales and marketing efficiency metrics a more valid metric. So, those are the big things that come up when I teach courses, talk to founders and finance teams, and then a little, you know, new versus existing allocation that we get that right as well.
[00:05:20] Joe Michalowski: Gotcha. I’m curious. Just because you know, a lot of people I come on, they have, they’re experienced, maybe like a handful of companies. You get to work with a whole bunch of different people. You see experience coming in from all different corners of SaaS. In my head, I can picture this like a horror story of spending months calculating CAC wrong and then going into a board meeting and trying to present it.
[00:05:39] And then, suddenly realizing like mid-presentation, somebody grills you on it, and it’s wrong. I’m wondering if you have any horror stories, any times you’ve seen where people like just didn’t have this calculation quite right. And maybe like the negative impact that has on a business, like why it’s so important to get this correct?
[00:05:56] Ben Murray: Yeah, because that’s what keeps CFOs up at night is that presentation to the board, to investors, and you get a number wrong. Other than running out of cash, probably the second biggest fear for CFOs is misrepresenting numbers in an important meeting with your board investors, potential investors. So, I think just the things that I notice a lot is people trying to twist CAC calculations a bit.
[00:06:18] You know, we have the traditional calculation, the traditional formulas for a lot of these metrics, but then they like to start excluding things. You know, “Let’s exclude the sales ramp.” You know, “And let’s not count new sales hires because they’re not productive, yet.” I think sometimes they twist it a little bit, which is fine if it makes sense for your business, you know.
[00:06:37] So things that go wrong, again, I think it’s fully burdened, making sure all those expenses are in there and sometimes they’re leaving expenses out, you know? So, it’s not a full picture for CAC. And then, if you are going to change a metric and say, “Take out the sales ramp.” For example, that’s fine. I’d still present it fully burdened, but then, also your adjusted metric and then make sure
[00:06:57] Joe Michalowski: Yeah.
[00:06:57] Ben Murray: you footnote it that, you know, so you’re not misleading anyone in any sort of an important meeting.
[00:07:02] Joe Michalowski: Make sense. I want to dig in a little bit on one of the points you just mentioned, which was sometimes that being okay, like not to misconstrue numbers or misrepresent the numbers, but to make the calculation, I guess, essentially your own, like whatever makes sense for your business. So, maybe as an example, like if you’re going to say, “We’re going to exclude sales rep ramp as, like, a factor in this, because they’re not productive, yet.” When might it make sense to do that? And when does it not make sense, or does it just, is it just a factor of making sure you are upfront about what you’re doing?
[00:07:33] Ben Murray: Yeah. I think if you’re presenting third parties that you’re upfront, you know, and how you’re doing that because sometimes that’s the thing with SaaS metrics. We have the traditional calculations, but then sometimes we do have to change it a bit to make it more relevant to our business. So, “How are we managing our business?
[00:07:48] What data do we need?” And, you know, then that kind of helps you maybe change the metrics a bit to make it more valuable for your business. So, I think with sales rep ramp, yeah. If you’re hiring tons of quota carriers, then you’re not going to know, hey, for your existing Salesforce, how efficient are they.
[00:08:08] You know? Until the new sales reps are ramped up, and maybe that’s months down the road. So then, I think it makes sense. Okay, for our underlying go-to-market engine, how efficient is that? Let’s exclude the rep ramp and then calculate it with the rep ramp because that’s also happening. So, I think that’s where it does make sense to calculate it both ways, just to make sure you don’t lose sight of your existing sales and marketing team and how efficient they are.
[00:08:35] Joe Michalowski: Yeah, makes total sense to me. I think, I think it gets into, or kind of rolls nicely into the next question I wanted to ask you, which was about how CAC calculations evolve as your company matures? ‘Cause, it sounds like it’s “Yeah, we have the basic calculation.” But it’s kind of a moving target.
[00:08:50] If we’re trying to adjust it based on what our company looks like, you know, a seed or a series A company looks a lot different than series C or D kind of trying to get closer to IPO. So, I’m curious, like what that maturation might look like and how that calculation changes over time?
[00:09:05] Ben Murray: Yeah, that’s a great question because it definitely does change over time. Early-stage it could just be, “All right, all our sales and marketing expenses, a hundred percent of that is going towards new customer or user acquisition.” And that’s it, pretty simple. Line into our sales cycle, we have a number. But then, as we evolve, maybe we have different ICPs or ideal customer profiles, and we want to calculate CAC by those ICPs.
[00:09:26] Maybe we have to go, we go after SMB customers and our enterprise customers. We don’t want aggregate CAC calculation that’d be misleading. So, there’s that evolution from “All right, not just aggregate customers coming in, but now let’s look at the demographics of those customers. Are they really different where we should split up CAC but by our ICP or those demographics?” Then also cohort analysis, then, you know, that comes
[00:09:50] Joe Michalowski: Hmm.
[00:09:50] Ben Murray: into play, you know, “Is our CAC improving with every cohort that comes in?”
[00:09:54] And, of course, the resulting retention. So, there’s definitely an evolution, you know. And then, the new versus existing split and sales and marketing spend, you know, now we have account managers going after existing customers and trying to expand
[00:10:06] Joe Michalowski: True.
[00:10:06] Ben Murray: ex-customer base. So, how do we split new versus existing expense towards CAC?
[00:10:12] So, there, yeah, there definitely is that evolution and maturity in the calculation.
[00:10:17] Joe Michalowski: It’s just that, that was crazy to me. I mean, you are the metrics guy. It’s great to talk to you about metrics. You, we’ve worked with Ray Rike as well, so I know you guys
[00:10:25] are the team that do your show, Metrics that Matter.
[00:10:28] Ben Murray: Monday Night Metrics.
[00:10:29] Joe Michalowski: Yeah. And so, I love that we’re, we could spend this much time talking just about CAC, and then it just snowballs. There’s just so much that goes into it. And that’s kind of why I want to roll back to where we started with CAC profile and needing the context because you said this is not a metric that basic calculation, it doesn’t mean a lot out of context. So, if we’re looking for the full picture of CAC performance beyond, like, the basic sales and marketing expenses, like, what other metrics
[00:10:59] kind of couple with CAC to make that full picture of performance that you need?
[00:11:03] Ben Murray: Yeah. When I’m, when I’m looking at that full CAC profile and the context around the company’s performance, of course, CAC, the gross expenses and then the unit cost of CAC and then CAC payback, big fan of that. And we can calculate that both on a local basis and also dollars coming in, and it’s kind of a, a dollar-based CAC payback period as well.
[00:11:23] Because we can move some local bias if we have customers coming in at a thousand dollars and customers coming in at a hundred thousand, that’s still one logo coming in, you know? So then, maybe we have to look at based on dollars and then cost of ARR, or it’s called SaaS CAC ratio. And that’s looking at sales and marketing spend versus the ARR that we’re booking, the ARR that we’re bringing into our business.
[00:11:44] Ben Murray: And that can also be split new versus existing. And then, there’s the SaaS magic number. I know some people not fans of that. I think that’s relevant for short sales cycle businesses because we’re measuring quarter-over-quarter growth. Now, if you have a 12-18 month sales cycle, I don’t recommend magic. And then, there’s LTV to CAC.
[00:12:00] So, when I talk about a CAC profile and with my clients and when I’m coaching founders, I’m looking at that set of data to see, you know, what does it tell me, what’s working, what’s not working within the business and not relying just on one metric.
[00:12:14] Joe Michalowski: Love that. It sounds like this is really a cumulative effect, but maybe there’s similar to magic number, you said that there are times when maybe it doesn’t make the most sense. I’m curious if there are some that are more strategically relevant for tracking than others or, at the very least like, are there other examples, like magic number, where if you’re this kind of business, don’t worry about this particular side of your CAC profile, but if you’re a different kind, like really need to heavily focus on another side?
[00:12:40] Ben Murray: Yeah. And, and I think we’ll talk about LTV, LTV to CAC, but I think you have
[00:12:43] Joe Michalowski: Yeah.
[00:12:43] Ben Murray: magic numbers that will, example I bring up all the time that you’ve got, if you’re short sales cycle, I think it’s okay to look at, if you’re longer, it’s not going to be as relevant because the time period doesn’t line up.
[00:12:54] So, I think with the CAC profile, one thing just to be aware of, there are a lot of benchmarks out there, these aggregate benchmarks, but you’ve got to be careful comparing yourself to those benchmarks because if you’re a thousand dollar ACB company, those benchmarks are different than if your product sells for 200,000 a year, on average.
[00:13:14] So, just
[00:13:14] Joe Michalowski: Yup.
[00:13:14] Ben Murray: that’s one word. Yeah, kind of just be cautious with those benchmarks. I, I do benchmark my clients, but we’ve got to have the appropriate benchmarks based on the profile of our business, to be effective.
[00:13:26] Joe Michalowski: Yeah, no doubt. It’s similar to things like surveys. I know you’ve done surveys in the past and research reports where yeah, I can find a stat that says 70% of CFOs believe X, Y, and Z, but if you look at the numbers, it’s like, well, those are all at fortune 100 businesses, and I’m running a series A startup, like, I don’t think we’re talking apples to apples here.
[00:13:48] So, you know, similar to everything you’re saying here about calculating CAC. Like, you need to make sure that you’re comparing apples to apples, because if you’re going to a board meeting and you’re saying, “Oh, we’re looking great.” But you’re looking great for a company that’s four times the size of you and it’s just not relevant.
[00:14:01] Ben Murray: Yep. So, same thing that context really matters. Yup.
A Closer Look at CAC Profile Metrics
[00:14:04] Joe Michalowski: Yeah, absolutely. So, again, is a CAC master class, I’d be remiss if I didn’t try to get us a little deeper into some of these like seemingly simple calculations. So, some of the ones that you mentioned, the three that I want to focus on LTV to CAC, CAC payback, and CAC ratio or SaaS CAC ratio, sorry. I think those are three that, at least in the experience I’ve had on this podcast and on webinars we’ve done, they come up a lot as, like, I’m not going to say controversial, but they’ve
[00:14:33] Ben Murray: Um,
[00:14:33] Joe Michalowski: like, everyone has different ideas of whether or not they’re relevant. And so, I want to start with LTV to CAC.
[00:14:39] I’ve read multiple articles. I’ve seen VCs. Comment say something about it being something of a misleading metric. I’m curious what you think that means if that’s something you believe as well. And maybe, like, our companies relying on that too heavily as a performance metric.
[00:14:54] Ben Murray: Yeah, LTV to CAC is a tough one because, yeah, it’s so ubiquitous. It’s out there everywhere. It’s expected as part of a pitch or, depending on your stage, and just part of your metrics dashboard. Because LTV is very sensitive to that churn number and the denominator, you know, and it’s also gross margin adjusted if you use that formula.
[00:15:12] So, I think when I’ve seen it, when I’ve been in businesses that target mid-market enterprise-type customers, so larger customers, it can be very difficult because you could bring someone in at a hundred thousand or 500,000.
[00:15:24] Joe Michalowski: Hm.
[00:15:25] Ben Murray: And your LTV to CAC is all over the place, you know? So, I think for those I look at now what I’m doing and especially early stage, if we’re trying to calculate LTV to CAC and it’s jumping all over the place, now I’m doing a men, meaning men, median, and max, because if I don’t feel comfortable telling him, “Hey, our LTV CAC is five.”
[00:15:45] But I, actually, really I could jump up to twelve and it could down to one. I can’t just go with one number. So again, that context. So, I think for small, for businesses that are small price point high volume, self-service, some live and die by LTV to CAC, you know, because they’re putting hundreds of thousands of dollars into paid ads to acquire
[00:16:05] Joe Michalowski: Yep.
[00:16:05] Ben Murray: customers.
[00:16:06] And retention is pretty set. They know how long customers are staying with them. So, they’re constantly playing with CAC and the LTV of that customer. So, I think in those types of businesses really critical. I’d say for mid-market enterprise, we’re calculating, we’re looking at it, we’re looking at that range, but we’re not over-rotating on it.
[00:16:25] Where some businesses, again, you probably need, you do need to live and die because you’re spending so much on paid acquisition.
[00:16:32] Makes total sense to me. And I think, again, I mean the theme here is going to be the context matters, and it just, all of these things entirely depend on your business model, your pricing strategy, and everything else that goes into, you know, what drives revenue for you. And so, love kind of getting into the nuance of that one.
[00:16:48] Joe Michalowski: The second one I want to talk about is CAC payback period. Because you mentioned it, you talked a little bit about the two different ways you can calculate it, logo versus dollar. And, uh, we had, one of our investors, John Ludig from Founder’s Fund On, and he’s mentioned multiple times that like every investor, every VC has like a slightly different way that they expect the calculation to go.
[00:17:08] And it seems to be as much as you can have a heated finance debate, ’cause I don’t know how heated, like, finance debates get, maybe they do, I’m not in those circles all the time, but CAC payback period seems to be one where people just are not in full agreement. I’m curious how you prefer to think about CAC payback?
[00:17:25] What are maybe some of the ways that you know people do calculate it that you think are mis, misleading or misguided? I’m curious how you think about it.
[00:17:33] Ben Murray: Yeah, I think CAC payback, one of my favorite metrics, just because with, we have to think about CAC, say at a high level, right? We’re investing CAC, and it has to pay back over time. So, I view CAC like debt. You know, so we put down this money, and now it’s being paid back over time. And that’s why churn is a SaaS killer.
[00:17:56] Because if you have poor retention, you’re putting all this money into CAC. You’re losing customers sometimes before they payback CAC. Now, you’re relying on new customers to fund both those previous and the CAC for that customer. And that’s where snowballs.
[00:18:10] Joe Michalowski: Yup.
[00:18:10] Ben Murray: So, I like to frame it up as, like, debt that even if that customer churns, you still have to pay that back.
[00:18:17] Joe Michalowski: Yup.
[00:18:17] Ben Murray: And then, also, CAC ties up working capital. So, if you have an inefficient go-to-market engine, you’re throwing all this money into the sales and marketing machine. And if it’s not being paid back efficiently, It’s just, there’s an opportunity cost to that capital. So, kind of getting into the economics of that.
[00:18:34] So, thinking about like debt that ties up working capital, so we have to be very careful with it. And again, you can calculate CAC payback based on logo, logo-based, and then the dollar base, which I kind of like too, because then you don’t have to split new versus existing. I just look at all net new AR coming into the business and how long it’s taking to pay that back, you know, and again it eliminates some logo bias if your ESPs are all over the place.
[00:18:57] And again, some people gross margin and adjust it. Some people don’t, but again, if you can get that nailed down, there’s some good benchmarks out there of how long it’s taking to pay back, and then we can optimize it, where do we stand and what do we need to improve it. You know, if it’s gross margin adjusted, maybe our gross margin is low, and that’s having a big impact on the number.
[00:19:17] But we measure it and then look at the inputs
[00:19:20] Joe Michalowski: Yeah.
[00:19:20] Ben Murray: and the error rate. “How can we leverage this? How can we shorten the time frame?”
[00:19:24] Joe Michalowski: One thing that comes to mind. I want to, I want to get to the third metric that we want to talk about, but something that comes to mind. ‘Cause I think, you’ve mentioned a couple of times, or we’re talking about the whole time is really the context here matters. You have to decide what makes sense for your business.
[00:19:35] A little bit of a tangent. I’m curious, how do you think, in your experience, SaaS finance leaders are, are dictating what’s right for their business? Is it coming down from, maybe, investors? It’s like, “We report on these numbers because our investors expect to see it.” So, that’s how we look at CAC payback or is it smarter or is it, you know, better to do it internally thinking only of what’s best for your business and how to think about that and then tell the board, “Hey, like, this is why we’re looking at this, and this is what it means.”
[00:20:04] Ben Murray: Yeah, I think it’s a, it’s a bit of both.
[00:20:06] Joe Michalowski: Catch 22.
[00:20:07] Ben Murray: Hopefully, those aligned together, you know, how your investors, your board want to measure your business and then how you are as a management team. But again, yeah, you have to have alignment there. And so, I’ve gone through that with state boards and your owners of “Here’s how we’re calculating it.” You know, it’s like, “Do you agree with that?
[00:20:23] Is that how you calculate it phase, say for your portfolio companies?” So, I think there’s got to be some alignment there. And if there’s a metric that, you know, is, is missing one way or the other, just have to understand, you know, why, why we’re using it, what, what value are we trying to get out of that, that metric, but definitely there is, there must be alignment between the two stakeholders, and hopefully that aligns.
[00:20:45] So, you’re not just producing metrics just to produce, to satisfy the third party.
[00:20:49] Joe Michalowski: Yeah, no doubt. We’re going to get a little bit to that as a question, but I got to ask you about the last metric to dig into because for anybody, maybe that’s listening that is follow along with our content or Ben’s content. We, Mosaic and Ben and Ray Rike, at RevOps Squared, we did a webinar together about the SaaS performance reporting, benchmark survey that we did.
[00:21:09] And one of the things that came up, as an interesting point, was the idea that CAC ratio is kind of like an underutilized metric and specifically like expansion CAC ratio. So, not just like CAC ratio for the business, but looking at your customer acquisition costs for expansion business. And I remember our co-founder Joe was on that, and he wanted to ask a question about like, “Yeah, that’s great
[00:21:31] in theory, we should definitely calculate that. But man, like that is a really hard thing to dig into and understand.” I’m curious if you can talk us through some of the data collection analysis challenges that come along with the seemingly simple expansion CAC ratio, but obviously not as easy in practice?
[00:21:50] Ben Murray: Yeah. And that’s the thing because you can only attract so much detail in your general ledger and your accounting system
[00:21:56] Joe Michalowski: Yep.
[00:21:56] Ben Murray: and the expansion CAC ratio. Again, our cost of ARR, where we’re just focused on the net new error that we’re bringing into our business from existing customers. You know? So, how much is that costing in sales and marketing dollars
[00:22:08] that’s just dedicated towards expansion? And sometimes it can be objective in certain cases, if we have a new business rep team and account management team for existing customers, I use that ratio then to split sales costs. So, I try to be objective as possible. Marketing is harder. Usually, I have to talk to the marketing leader.
[00:22:26] “Where are you spending your time? Let’s look at your expenses.” Is it easy to identify expenses that are new versus existing? And then after that you just have to go kind of on a subjective measure.
[00:22:36] Joe Michalowski: Yep.
[00:22:36] Ben Murray: All right. Usually, I see 70, 30 splits, 70% new, 30% existing. And you have to go with that split. And again, when I do that, I make sure that’s footnoted in
[00:22:45] my board deck, my package because that’s a really important assumption, the offers 50-50, 90-10, that really sways the numbers. So, again, set up of your chart of accounts. You’ve got good coding for marketing expenses by your major acquisition channels. And then, on the sales side again, is there an objective measure where you can split that?
[00:23:06] And sometimes, again, you have to fall back just maybe we just have to guess, but make sure you just put that assumption out there, so people know that.
[00:23:13] Joe Michalowski: Yeah.
[00:23:13] Personally, I work in marketing, so, personally, I can attest to a lot of things we do being a little more subjective than the direct things on the sales side. I know it’s not easy in any case, but I’d imagine chatting with marketing leaders and figuring out like what that split looks like is not an easy task, but a one that, you know, the best CFOs and best finance leaders are able to tackle.
[00:23:34] Cool to hear you kind of walkthrough that. So, great, great to hear you dig into these three sort of key parts of the CAC profile.To kind of round this out, I want to talk a little bit about the context mattering and analysis because, you know, tracking the metrics is only like, I don’t even want to say half the battle,
[00:23:54] it might be less than half the battle because it’s really hard, but it, spitting out metrics is not enough. Like, you need to be able to actually use those metrics and dig into them and understand why they’re impacting the business and what you can do about it. So, I’m curious, you know, once you have your CAC profile, you understand this about a business, maybe a client, what do you do next? Like, what’s, how do you analyze these numbers? Like, what are you looking for in patterns to understand maybe where a business can grow strategically rather than just saying like, “Hey, here’s our CAC and like, we understand it well.”
Finding Strategic Insights in CAC Calculations
[00:24:25] Ben Murray: Yeah. I think, yeah, you’ve got to actually do something with those numbers, with those metrics. So, when I implement my metrics dashboard, say for clients and SaaS companies, we’re looking at “Right, what’s working, what’s not working in our business? Does that make sense? Does it match up with the story?”
[00:24:39] If I say we have poor CAC performance, does that match up with operations and what you see on the front lines, you know. So, making sure we’re actually calculating these and they align with the operational story. But once we have those calculated again, I’m always looking at the overall financial profile “What’s working,
[00:24:55] what’s not working, what’s a choice?”
[00:24:57] Joe Michalowski: Yep. Okay.
[00:24:57] Ben Murray: Maybe we’re burning cash, and the EBITDA’s negative. That’s a choice in that metric. And then looking at the sales and marketing side in that CAC profile. “All right, what does it say? Do I have a lot of green on the board, everything’s good? Do I have a lot of red on the board?” And then looking into that.
[00:25:10] So, “Why do we have a lot of red? Why are we inefficient sales, marketing, maybe we’re early stage?” And it makes sense. We’re trying to figure out that go-to-market fit. You know, maybe we’re still figure, figuring out product-market fit. And we calculate it. We bonded her, but we, again, we don’t put too much pressure on those metrics, but if I’m say 5, 10 30 million AR company.
[00:25:30] Then, yeah, I’m going to put a lot of pressure on those metrics. If, if it’s coming up red and we’re inefficient and then it’s like understanding is our go-to-market motion aligned with our price point, you know? So, sometimes you see, “Hey, we’re creating this new product. That’s $2,000 a year, but we’re building an SDR and new business rep team.
[00:25:48] That’s going to be expensive. It doesn’t line with a $2,000 price point.” So, talking a lot with founders around the pricing. The sales motion is an inbound, outbound, combination of both that the economics are gonna make sense there, you know. So, then looking at that pricing ICP, product roadmap, and the alignment of those three, to make sure eventually the economics will, will work out there.
[00:26:13] Joe Michalowski: Yeah, this, you know, I, I’m very fortunate to work at a company where we have a lot of finance experts, internally. I’ve been a writer for a lot of my life and not a numbers-driven person, getting a new appreciation for the work that people like you and other finance leaders do to actually track all this and figure it out.
[00:26:32] I think that’s probably been one of the most interesting things about having these chats with finance leaders is, just any of those, like few minute spiels about how you guys look into what the numbers mean. So, really cool to hear you talk about that. Where I want to go next is that’s great, we know how to calculate our numbers.
[00:26:51] We know that we need to be looking into the why behind them. But we’ve found at Mosaic, at least, like it’s a problem that we’re trying to solve is that maintaining, like, visibility into all of these numbers and understanding, like, how to pull all the data correctly. It, it’s not easy. Like, that’s, that’s a main challenge for a lot of people in finance.
[00:27:07] And so, I’m curious if you have any advice for people listening about how to get into a routine of data collection, cleanlier data, so you aren’t always fighting an uphill battle to get these metrics, correct.
[00:27:20] Ben Murray: Yeah. Yeah, definitely. I think it’s one identifying “What are your KPIs, what are your metrics that you need on a monthly basis?” So, it’s not a fire drill every time or that board fire drill. “Oh my Gosh. We’ve got to calculate CAC for the board, but we don’t do it on a monthly basis.” So, making it part of your operating routine.
[00:27:36] So, are those metrics, and working backwards. So, what systems, what software is that coming from? What reports do we need? So we can put that monthly routine in place because with SaaS metrics, it’s a journey. This does not happen overnight.
[00:27:47] Joe Michalowski: So.
[00:27:48] Ben Murray: Maybe the data isn’t there, so we can’t even do it. “Okay. How do we fix that?
[00:27:51] Do we need a report on a differently? Do we need a proper CRM setup? Do we…?” You know, so CFOs, for all these metrics, we need HRS data. Yeah, we need accounting data. We need operational data to pull this together, to calculate it. And that’s why it makes this so hard
[00:28:06] Joe Michalowski: Okay.
[00:28:06] Ben Murray: to pull all these together. So, again, it’s putting that monthly routine in place.
[00:28:11] “What’s your objective so you can make this a systematic process each month, even if it starts in spreadsheets? Okay, all right, then what software tool could be applicable for that so you can make it efficient?” Because yeah, we’re, we’re data, data-hungry in finance, you know, we need this data
[00:28:25] Joe Michalowski: Yeah.
[00:28:25] Ben Murray: every month as part of our routine.
[00:28:27] You know, and again, I always say it’s, it’s baby steps. It takes time. Don’t be frustrated if, in a month, you don’t have a complete metric set because it just doesn’t happen that way.
[00:28:38] Joe Michalowski: I really like the idea of being patient, you know, as, especially in the work that we do our, our target audiences, VC backed startups. And patience is not really the name of the game for a lot of the business you’re trying to grow at all costs. You’re just really pushing hard, and, you know, finance has to be that kind of voice in the background saying like, “Hey, like we got to, yes, we’re going to push.
[00:28:57] Yes, we need to get all this, but we need our data, and we gotta, we gotta take the steps now to get there, you know, a few months down the line.
[00:29:03] ‘Cause it’s going to take some time.” Cool. So, I mean, we’re, we’re coming up a little bit toward the end of time. There’s one question that we ask everybody that comes on that I would like to ask you, um, especially with all the experience that you’ve had in all these different companies, and it’s really zooming out.
[00:29:17] So, just what’s one thing you know now that maybe you wish you knew at the start of your finance career?
Finance Career Advice from Ben Murray
[00:29:22] Ben Murray: Yeah, I, there are two things that actually stand out here. The first is the presentation and communication of data. So important in the finance function, we get into the leads, but then how do we effectively communicate this to our stakeholders, to our board, to our investors, to our potential investors. So, a lot of time on presentation, I didn’t realize how many red marks would be on my presentations early in my
[00:29:44] FP&A career, to present the data in the best way so it can be consumed, easily consumable is a big deal. And then, I didn’t realize how much time I spend understanding the sales of marketing machine. Thinking back to grad school, maybe you take a marketing class, and you think, “Oh, that’s kind of a softer skill, not finance, hard skill.” But man, now all I do is spend time understanding sales and marketing and how that’s working, you know.
[00:30:08] So, you spend a lot of time with what those departments.
[00:30:11] Joe Michalowski: Love it. Something that, maybe in the future, we can talk about if we do another episode is kind of collaborating with those teams. ‘Cause, that’s something that comes up for, for our prospects, for our customers, all the time. They’re looking for data so they can go bring those strategic insights to those teams.
[00:30:25] But it’s, you know, you’re dealing with the CRM, really complex system,
[00:30:29] to get good data out of that. You’re dealing with marketing, which is really subjective sometimes, really hard to nail down numbers for some of that stuff, like branding so-called, maybe a topic for another day but, but for now, I want to be respectful of your time.
[00:30:41] So, I want to kind of leave you with the last question for any, any of these kinds of events. Um, it’s your time to shine, Ben. Like, where can people go to learn more about you, learn more about, I know you do a lot of podcast
[00:30:52] webinars, things like that. Where can people go to find all of the stuff that you’re working on?
[00:30:56] Ben Murray: Oh, sure. Yeah, I’ve got tons of free resources, templates, downloads, forecast models at thesaascfo.com. Thesaascfo.com, and then I’ve free video lessons and courses as well at thesaasacademy.com. So, thesaasacademy.com some free and paid courses, as well. So, tons of content out there if you’re new to SaaS or if you’ve been looking to take your SaaS skills a little bit farther.
[00:31:20] Can give the thumbs up to all of that. When I was starting writing for Mosaic a long time ago, as a marketer with, without a finance background, all of your resources invaluable to me, to understanding kind of the work that we’re doing here and knowing what everybody’s talking about. So, appreciate just all the work that you do for the finance community.
[00:31:37] Very much appreciate you coming on and taking the time today. But I hope we can do it again, sometime. And just want to say it was really great having you on The Roll Forward.
[00:31:44] Ben Murray: Yeah, thanks, Joe. Really appreciate it. Love diving into CAC. So, it was a lot of fun.
[00:31:48] Joe Michalowski: Awesome. I, we’ll talk soon, Ben, thanks so much.
[00:31:50] Ben Murray: Thanks.
Venture Stories: Transforming Corporate Finance and Working with Investors
Our Co-Founder Joe Garafalo and Trevor Oelschig of General Catalyst share how finance is evolving and tips for building the best relationships with investors.
Strategic Finance in B2B SaaS
One of the key attributes for the modern finance leader is the ability to "tell the story" that the data is telling - find out how you can do the same.