This is the second article in a series of five covering SAAS benchmarks, with data from the UK, USA as well as the impact of covid.
Today our focus is on CAC and CAC Payback.
What is CAC?
CAC, or customer acquisition cost, is the amount spent to acquire a new customer. CAC Payback is the length of time (usually months) for the company to recoup the acquisition cost.
CAC and CAC Payback are two critical and complementary metrics for growth companies as they speak to the pace at which a company can grow and the cash that it will require to meet its growth
What costs are included in CAC?
The definition of CAC can vary slightly by investment firm. Generally, it will
- Marketing and advertising
- Business development costs
- Salaries for the sales and market teams
- Sales commission and sales incentive schemes
- Any other costs incurred specifically to acquire new customers
These costs are divided by the number of new customers, resulting in the average cost to acquire each new customer.
To calculate CAC Payback, simple divide the CAC per customer by the average profit margin per customer. This results in a formula as shown above. The key is to calculate the CAC per customer as the numerator and the Average Profit Margin per customer as the denominator.
Our data platform calculates this for you, specifically considering the types of revenue that are recurring and allows you to tag all costs which are included in CAC using detailed account level detail in the financial system, without having to spend time digging through your spreadsheet.
And so what are the benchmarks?
CAC can be quite difficult to compare across companies. The CAC to acquire a customer which will spend £1M with you typically has a very different profile to one who will spend £500. While there are a few companies that claim to provide comparable CACs, this can be so tricky.
Instead, we will focus on CAC Payback. Because it incorporates not just the acquisition cost but also the value generated by a client, making the data much more comparable.
Here are three of the relevant and comprehensive benchmarketing studies in the market
OpenView Partners collects by a global set of VCs, including several based in the UK and Europe, so it is a balanced international perspective.
This graph shows reasonable ranges of CAC Payback by growth stage.
You will certainly notice that the CAC Payback range gets larger as companies grow and raise more money. This graph shows the distribution range, for companies generating more than £2M in revenue.
What has been the impact of covid?
Covid has had little impact on CAC Payback period. Evidence suggests that companies which
struggled to grow during covid, just scaled back their sales and marketing spend. As a result
marketing costs as a % of revenue fell but payback was largely stable.
Are there any UK or European specific benchmarks?
Sadly, there are very few robust SAAS benchmarking studies conducted specifically in the UK.
Serena did conduct a European wide study of 108 companies (only!) with the finding shown below.
It is interesting to note that the payback period really spikes at around 5M ARR. This could be
driven partially by the small sample size of this particular study: