What Marketing Costs Should be Included in CAC Calculations?

Dear Kellblog:

I’m working on my CAC calculations and I’m trying to determine if I should include all marketing costs or just my direct demand generation costs?  I’ve talked to many of my CMO peers and can’t get a consistent answer to the question?

Thanks / Bewildered CMO

Dear Bewildered CMO:

My gut reaction is that you should include all marketing costs.  Don’t try to argue that PR and product marketing don’t work on customer acquisition.  Don’t try to argue that people aren’t programs and try to exclude the cost of your demandgen team.

Why?  Three reasons:

  • Demandgen people and programs dollars should be fungible.  PR and product marketing better be doing things that help acquire customers., even if indirectly.
  • Playing counting games can hurt your credibility.  VCs aren’t just trying to compare metrics, they’re trying to get to know you by seeing how you think about and/or calculate them.  I’d think you were a weasel if I found you excluding these costs without really good reason.
  • To the extent that people try to compare these things between private and public companies, remember that there is no way to split marketing apart (or split customer success from sales) with public companies which should suggest that by default you include things.

Best / Kellblog

For fun, let’s go quickly look at some sources for CAC definitions and see what we find regarding this issue:

Kellblog defines the CAC as:

dk-cac-pic3

S&M, by default, needs to include all S&M costs, so you can’t cut anything out.

(Side note:  to the extent you amortize commissions, I would prefer to say cash sales expense as opposed to GAAP sales expense, because the latter will hide some costs — but that has nothing to do with marketing.)

The 2015 Pacific Crest Private SaaS Company Survey defines the CAC as:

How much do you spend on a fully-loaded sales & marketing cost basis to acquire $1 of new ACV from a new customer.

This seems to close one door (i.e., you better include IT and facilities allocations to your sales costs — as GAAP would require anyway), but open another because it defines the CAC not in terms of total new ACV, but new ACV from new customers.  So if, for example, you had installed base upsell marketing programs, then I would not count those costs in the CAC calculation because they are not marketing costs spent to win new ARR from new customers.  Is PR?  Is product marketing?  It’s a slippery slope.  I’m not in love with this definition for that reason.  You could never do it for public companies.

David Skok defines the CAC as:

Note that while Skok is calculating a cost to acquire a new customer as opposed to $1 of new ARR, his definition is clear when it comes to splitting marketing costs:  include all S&M costs.

Bessemer prefers talking about a CAC payback period and defines it as:

bess cac

Again, this definition is clear — include all S&M costs.

5 responses to “What Marketing Costs Should be Included in CAC Calculations?

  1. Great post. Am curious about two current topics of discussion @ our organization. The first is excluding a portion of marketing expense that is “brand” marketing verse direct selling and thus shouldn’t be part of CAC. The second is excluding all or part of salary expenses for selling managers, as they aren’t directly selling but manage those who do. Do you have thoughts on either of these?

    • It’s too hard to separate brand from non-brand (and a slippery slope, what about PR, customer case studies, etc.) so I wouldn’t do it. I think most VCs would think you’re trying to bury cost. Ditto on sales managers. If you can’t have salespeople without them, they are part of the CAC because the CAC is all about scaling. In fact, this suggests you’re better off omitting some “brand” than sales management if you had to pick one– but I’d omit neither.

  2. This might seem like an obvious question, but ‘all sales and marketing costs’ includes salaries?

  3. HI Dave — Thanks for the post. I’ll add another definition posted by the folks at OPEX Engine who I’ve learned to trust due to their rigor on defining benchmarks in order to make them meaningful and comparable: https://www.opexengine.com/10-expenses-not-include-saas-cac-calculation/ — First paragaph — ” Calculating SaaS CAC correctly is not as simple as dividing total Sales and Marketing expense into the number of new customers acquired”

    I relate to this definition as we and many SaaS companies have blended S&M orgs who are doing both new client acquisition and upsell/account management and those costs are not always clearly segmented. We’ve had conversations with many practitioners who have gone more to a “Revenue Acquisition Cost” metric which is more like the Pac Crest or your definition in that its really about knowing what you invest in S&M to add $1 of ARR to the book and then understanding what efficiencies you gain by upselling vs NCA activity.

    BTW – am a fellow fly fisherman and a SaaS exec, and a customer enjoying your product.

    • Agree you can split both sales and marketing costs, if you want and have the tracking in place across four categories: generic/other, new customer demandgen, existing customer renewal, existing customer upsell. You’d need to allocate the first across the other three, but then use three to get a better handle cost to acquire vs. cost to renew vs. cost to upsell. Thanks for reading!

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