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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.

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Ben Murray Gives a CAC Masterclass

Episode Summary

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.

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Featured Guest

Ben Murray

Founder, The SaaS CFO

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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

Key Themes from the Episode
  • 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.”

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