CAC Ratio - An Under Utilized SaaS Metric

Live from Schenectady, New York, it's SaaS Talk with the Metrics Brothers, Growth and CAC.

And I'm Growth, also known as Ray Reich, the founder and CEO of Benchmarket, formerly RevOps Squared.

And I'm CAC, better known as Dave Kellogg, independent consultant, EIR at Balderton Capital, and author of Kellogg, Formerly known as nothing.

That's a good one, Dave. And together we are the Metric Brothers.

An unlikely pair at that. Today's episode is the 5th in our recently launched podcast, SaaS Talk. In the last episode, we talked about pipeline return on investment. What's on tap for today, Ray?

Well, Dave, I thought the perfect follow-up to measuring pipeline returns was moving to that next phase of opportunity. a closed opportunity or a new customer, which you said in the last episode that was your favorite type of pipeline, pipeline that closes. So I thought we'd talk about customer acquisition cost.

Awesome. You're going to talk about this metric, right? There's a, there's a lot, you know, like many SaaS metrics, it seems simple. Hey, how much does it cost to acquire a customer? But as we discover, there's CAC versus CAC ratio. There's like 3 or 4 different dimensions of how CAC gets calculated. So I think it's an exciting topic.

Well, Dave, I don't know anyone else who can truly understand CAC better than you. My metric, rather, is CAC, which I'm still trying to figure you out, though.

Well, there you go, Ray, trying to make fun of my CAC nickname. I let you be growth. You know, that was pretty nice of me. But, but I am very interested in customer acquisition costs given my background.

Yeah, I'm thinking maybe I should change that nickname to efficient growth because that's all anybody wants to talk about. Before we get into the meat, let's jump into a quick word from our presenting sponsor, The Metrics Brothers is proudly sponsored by Benchmarkit, the B2B AI and software industry's largest, broadest, and most contextualized benchmarking index. Dave Kellogg and Ray Groth Wright have put the Metrics Brothers podcast on hiatus for remainder of 2026. All episodes we have ever recorded are still available on your favorite podcasting app. You can reach Dave @kellogg and Ray on LinkedIn @rayreich. Thank you so much for listening to the Metrics Brothers podcast. Okay, CAC, let's start this discussion with your definition of customer acquisition cost.

Okay, okay, growth or efficient growth kind of wording. Look, customer acquisition cost taken literally is the sales and marketing cost of acquiring a new customer It's typically calculated by taking prior quarter sales and marketing expense and dividing it by the number of new customers acquired this quarter.

Okay. We already started a hot, maybe disagreement or topic. That is, what period do you use for sales and marketing expenses? I've always said if it's 90 days or lower, I'm going to use the current quarter of sales and marketing expenses and divide that by the number of new named customers. And if it's 90 to 180 days, then I'll use previous quarter. What say you, Dave?

Yeah, look, I appreciate the intent of what you're doing. Um, and by the way, on monthly SaaS businesses, I would actually one-up your disagreement with me disagreeing with you, uh, which is I would use prior month sales and marketing divided by this month. But here's the problem I have, Ray. It's about standardization versus optimization. What Which is, you— yours might be more precise, right? You're saying, hey, wait a minute, with a short sales cycle, I'm going to use current quarter sales and marketing expense divided by current quarter customers. And it makes sense spiritually, but most other people calculate it based on prior quarter. And then you've actually started the slippery slope of, oh, I've got a 12-month sales cycle, so I should do a rolling 4-quarter average sales and marketing expense divided by— And to me, I just— My take on this is it's better to be standard and wrong than it is to be more precise and non-standard. So I always use prior quarter, and the only way you'd get me to change would be in a pure monthly business with, you know, with a 15-day, 20-day sales cycle, then I might do month over month.

Well, I won't get into additional precision, but that is— I've seen some companies say, well, I'm going to use last accounting period's marketing costs, whether that's previous month on a monthly sales cycle or previous quarter in a quarterly sales cycle, but I'm going to use this accounting period sales because I had real sales costs in the period they closed. Is it even worth debating that, Dave?

Well, look, Ray, I mean, I think this is— with all SaaS metrics, this is a constant trade-off between how well do we make the metric, kind of redefine/adapt the metric to map to our specific business, Versus how much do we want to be standard? And you want to be standard for one of two reasons, because you're talking to investors, right? And they have their standard way of calculating it. And the other reason is benchmarking. I'm pretty sure if I buy one of your benchmarks from Benchmarkit, or I use one of your benchmarks because some are free, you've done it a certain way and I should calculate it the way you calculate it if I want to benchmark against that data. No?

Yeah, I think you just highlighted the most important thing in this part of our conversation. Define it, communicate how you're doing the calculation, and make sure that your stakeholders know how you're doing it— your executive team, your investors. And if you're using benchmarks, understand how that organization calculates, which is why we created the SAS Metric Standards Board, Dave, to have one standard way of doing it.

So as long as we're into pathological corner cases, I'll give you my favorite one. Well, actually, it won't apply until we do CAC ratio. So I'll hold it off till CAC ratio. But remind me of the corner case on CAC ratio. On CAC cost, It's just when you add the customer. So we don't have to worry about land and expand behavior. But as soon as you get into CAC ratio, you do.

Well, I think that's the perfect reason why we should move on to CAC ratio. But right before we do, I actually think this whole conversation for the last 4 to 5 minutes about CAC is pretty meaningless because I think CAC as a standalone metric has very little use because it's not in context of how much ARR that you brought in, etc. How would you recommend people use CAC as a standalone metric, Dave?

So look, I'll contradict you in one pretty specific case, which is the more your deals all look like each other, the more you can do unit-based, right? Just say that every deal you sell is $10,000. Okay, then why not say how much does it cost to acquire that customer? $15,000. Okay, my CAC— well, my CAC ratio will be 1.5. I'll get to that in a minute. But to the extent that every customer looks like every other customer, I think it makes sense. And that's the only case in which I think it makes sense to talk about a customer acquisition cost. If you're selling deals with different sizes or some sort of like a bimodal distribution of deal sizes, like we had at HostDynamics when I ran it, now Planful, right? We had a bimodal distribution. In any case like that, basically in any case except the exception where all customers are identical in size, then I think the CAC ratio makes a lot more sense. It's the same calculation, but instead of per customer, it's per dollar of ARR. So in my world, it'd be prior quarter sales and marketing expense divided by this quarter new ARR. And that's predicated on my definition of new ARR, which is both flavors, which I consider new ARR to come from 2 sources, from new logo customers and from existing customers. So that would be my first order CAC ratio definition.

Okay, so instead of getting into a debate on the calculation model, 'cause we're 98% aligned, Dave, Why is CAC ratio such an important metric for you? When you were the CEO or even the CMO, how did you use CAC ratio?

I mean, I think the reason it matters so much is investors care a lot about it. So if you want to raise venture capital, you better understand your CAC. You better understand how it benchmarks against others with similar businesses and their CACs. That's the first reason. And I think it's far and ahead the bigger one. Just say you're bootstrapping, you're not going to raise money, so you have no investor concerns. It still matters a lot because it tells you the sales and marketing cost of growing your ARR base. Like, if you're a $10 million company with a $1.5 CAC and you want to get to $20, that's going to cost you $15 million in sales and marketing expense before you backfill any churn, right? Because along that journey from $10 to $20, we're also going to have churn that we need to backfill at a $1.5 CAC. So I think the predominant reason is investors care, and if you want to raise money, you need to care about what they care about. And I think the secondary reason is it tells you roughly how much cash you're going to need to grow. But I think burn multiple is actually better for that because it's all in. It's not just sales and marketing cost.

Yeah, I'm going to circle back to what you said about your definition of CAC ratio, which is you look at your totally loaded sales and marketing expenses from a previous period and you divide that by new customer ARR and existing customer expansion ARR. This is like 2 brothers who are always fighting, you know, before their parents walked into the room. So I believe that CAC ratio needs to be calculated for both new name customer ARR. So I know how efficient I am acquiring new ARR from new customers, which is very different than what it costs me to grow a dollar of ARR with my existing customer. Also known as expansion ARR. Why do you kind of bring them together versus looking at each independently, Dave?

So this is back to what I call the Princess Leia problem of— and this happens a lot in marketing attribution, but the tighter you grasp, the more that slips through your fingers. I want to quote from the early Star Wars, whenever she gets captured. So with a lot of SaaS metrics, the tighter you grasp, right? Ooh, I'm not just going to look at overall customer acquisition costs. I'm going to segment it. Or the ultimate tight grasp, we're going to do detailed marketing attribution by channel, as we talked about, right?

It's back to the same problem.

The tighter you grasp, the more it can slip through your fingers. Meaning in this specific case, good luck allocating your PR guy in marketing to new versus expansion, right? Good luck allocating, I don't know, your CRO's chief of staff. Good luck. I mean, there are ways to do these allocations, right? Good luck allocating the cost of your website, the cost of your newsletter. That to do what you want to do requires— look, segmenting the ARR is easy. That's the easy part, right? Segmenting the sales and marketing cost is Typically, the sales cost is easier, although it depends. If your sales reps do expansion, it's not easy at all, right? So it depends on your sales model. But basically the reason I'm— and by the way, Ray, I will, as you well know, I will calculate a segmented CAC, but I put a little asterisk on it and say based on allocations.

You know, to pick up on your Star Wars theme.

Hmm, Dave Kellogg, confusing you are.

Now what that means is I know you like cohorted and segment-based CAC, like if you're selling to the enterprise market versus to the SMB market, and often all your sales and marketing expenses aren't that granular that this is just marketing for SMB. So do you think it's so important to do that segmented CAC ratio calculation, Dave?

So now you're talking about business segment versus ARR type segment, which is so— because there's, there's multiple ways to segment it. The first one was basically blended, or what I would call overall CAC versus new logo CAC and expansion CAC. And there you have to do allocation of sales and marketing expenses. The ARR determination is easy. Now I think you're talking about kind of line of business CAC. Is this enterprise ARR or is it SMB ARR? And once again, depending on your sales model, it might be pretty easy to do. The thing I worry about is let's not get the cart in front of the horse. On the prior example, let's not say customer success can never sell expansion because it's going to break our CAC calculation, right? That's cart-porse inversion. Let's decide what the right model is. Do we want customer success doing incremental expansion and then correct for that in our SaaS metrics? So ditto for you. I wouldn't want the sales model tail to wag the dog. But if we have a sales model that's reasonably segmented— and by the way, Ray, the way I would hack that one is I just look at the sales CAC. It all depends what question I'm trying to answer. But say my marketing expenses are really smushy and I don't know how much went where, I could— and but my sales expenses are super split between SMB and enterprise, then I can do my sales CAC, right, very clearly and be very precise and segmented at the same time.

Yeah, but I think the reality, Dave, is, you know, a company's really good in mid-market, kind of that $100 million to maybe up to a billion, and they hit $10 to $15 million, they're like, we got to go to enterprise, bigger deals, better brand awareness. So We're going to hire 2 or 3 enterprise AEs, but you still got to market to the enterprise. Maybe you have some strategic account-based marketing, and then your CAC ratio overall goes from $1.38 to $1.62. Don't you really need to understand how that new market that you're trying to penetrate impacted your CAC ratio? Is that just too much detail?

Well, look, I think I could get it off the sales CAC that I just described, because look, the sales CAC is not particularly useful for benchmarking because people don't publish it. But it is useful to compare your 2 different distribution channels, right? If you've got a direct channel into mid-market and you're starting a direct channel into enterprise, then you can compare the cost of those. Gosh, it costs us $1.10 in mid-market to sell a dollar of ARR. It's costing us $2 in enterprise. And that's just the sales CAC alone without messing around with the marketing allocations. So look, you can do it the full way and just say, oh, 20% of our marketing is going to enterprise and 80% is to SMB. If it makes you feel better, you can do that and get that. You can get a segmented CAC as opposed to a segmented sales CAC. But personally, I'm always— I don't know, I always start with what question do we want to answer? And if we want to answer the question, is it currently, you know, how much should we be spending on this enterprise sales initiative? And look, if over time it's pretty mature and it's got a much higher CAC than the mid-market one, then I'd say there's something wrong with our enterprise sales, right? Like in the beginning, you could say, well, it hasn't developed yet and we need more time and the big deals will come later. Right. Okay. But say you're actually pretty established at it, then it's a problem in my mind. I mean, it better have a lot lower churn so you have much lower lifetimes. Otherwise, I'd be quickly asking, why are we doing this again?

What are some of the common issues you see with people calculating CAC? So one of the things I see is the confusion between, am I using fully loaded sales and marketing expenses, or I'm doing this more as an incremental variable? kind of CAC ratio. And I think it depends on what you're trying to measure, Dave. But do you see people confusing those 2 things? Or is it more when marketing's doing it versus sales is doing it?

So I think there's 2 things. I mean, technically, I did define it as expense when you asked me the definition at the start of the podcast. And expense means GAAP. And GAAP means commissions are amortized. And it means rents included, I think, right? So it would be fully loaded and include commissions on an amortized— that's the right word— basis, right? So by default, that's the answer. Now the question in my mind is, should we correct it? Should we, should we do the commissions on cash basis? I vote yes. And should we unfully load it?

I don't know.

That one I'm going to kick back to you, Ray. A lot of startups dump a lot of cost into G&A. So just say you had a big building for all the salespeople. They'll put that in G&A costs, which messes up not only your P&L benchmarking Because G&A looks really high, but it also messes up your sales and marketing as a percent of revenue, and in turn, it messes up your CAC calculation. So personally, as something of a purist, I would correct it once, which is to accelerate the commissions on a cash basis, and I would leave the rest of it as a GAAP expense basis, meaning the rent for the sales team is included in the calculation.

I agree on the expense side, and that is, If I actually would say if your P&L has tools or rent and G&A, I say leave it there, don't bring it in. But then I wanted to really double-click on these sales commissions because ASC 606 has changed the way you have to recognize sales commissions. And that is you're supposed to recognize sales commissions over the useful life of the customer. So let's say it's a $15,000 sales commission an AE earned. and your useful life is 5 years, you'd amortize that $15,000 over 60 months. I think that's terrible for CAC ratio because it really makes it look much more efficient than it really is, Dave, on a cash basis. So I say always use the actual cash cost of commissions right up front.

So yeah, so let me, let me go back on expense. I'm going to agree with you, which is if you currently put the rent in G&A, leave it there when you calculate the CAC, But somebody make a note to go fix the P&L, right? Because as you get bigger, I want the P&L to have the rent in sales and marketing. So, so, but you're right, I wouldn't actually adjust the calculation. Just thinking what I'd actually do. So I agree with you on that. On the ASC 606 issue, yes, it materially reduces your CAC when you push all the commissions forward. And I would correct for that, as I think you just said to do. And as I think in your SAS Metrics Standards Board, you have also done, right? If I looked at your definition of CAC, it would say do it on cash, do commissions on cash, not GAAP.

There you go. Our advisory council member of SAS Metrics Standards Board, Dave Kellogg, asking me questions about what he told us to do. No, you're exactly right, Dave. You know, gosh, I hate it. Every week we move so quick, and I want to talk so much more. But I just— every day I'm dealing with this concept of free trials or freemium and a PLG model, or now in the usage-based model. So I think we should dedicate the entire next episode to how this evolving go-to-market and pricing packages impact how you calculate CAC ratio. Sound like a good idea, Dave?

Yeah, I think that's a topic. I think PLG and freemium is a topic for another episode. But let me dig in with a point of view on land and expand now, if that's okay.

Let's go.

So most— much of what we've talked about, Ray, I think for the true SaaS metrics aficionado, that's ground they know. Like, we've talked about these issues. This one to me is slightly more subtle, and it's what is new ARR anyway? Forget the from new versus existing, but let's just say I have a business model where somebody lands the $1K order and reliably within 60 days they upgrade to $5K. And the question is, when I'm doing my CAC ratio, do I base it on $1K or do I base it on $6K, right? What was the land and what's the expand? What's the new logo CAC? What's the expansion CAC? One blessing of the blended CAC is I don't care. But, but, but as soon as you're segmenting, we have to say, well, wait a minute, what's land versus expand? Um, and it's gonna have a dramatic effect, right? Because if I just count the $1K as the land, then my new logo acquisition cost is going to be very high. And my expansion, I'm going to look like a god, and my NRR will make me look like a god. And conversely, right, I can end up looking pretty bad if I don't expand much beyond that $6K in the coming year, right? I'll look like I have bad NRR. So, but my personal belief is if you have a reliable land expand, boom boom, like within 30, 60 days, count that as the land. As soon as it's getting to be 6 months and it's not that reliable, but it's more usually Then I'd say no, that's actually expand. If it happens 6 months from now, once in a while, that's called expand. We know what to do with that. It's not called land. So I don't know if you have views on this one, Ray.

I'm going to pull my green visor out as an accountant and refer back to something called vendor-specific objective evidence. You remember VSOE, Dave?

I do remember VSOE, Ray. It's terrifying, but I do.

And by the way, for, for the younger demographic out there, just do a Google search or talk to ChatGPT and you'll find out what that is. But yes, if you've got a highly predictable and proven ramp period of 3 to 6 months, just consistently say that's going to be my new ARR, and anything after that is expansion ARR. That's going to be equally important for another metric, which is net revenue retention. When does it go to expansion ARR, and thus it goes to net revenue retention? So we actually, in the SaaS Metric Standards Board, when we were talking about these metrics, We said you got to have vendor-specific objective evidence of when it's new and when it's expansion.

Excellent. That's an excellent answer, Ray. And thank you for taking a stroll down memory lane to VSOE, which I think was initially about services versus software pricing, if memory serves. It was.

And it's when you could recognize services revenue. But once again, I don't know if a lot of our audience wants a history lesson on that, Dave.

Okay.

So, well, that's the end of this week's SaaS Talk. CAC, do you— you know, once again, you're CAC, I got to give you a chance. Anything else you want to say about your pseudonym?

No, I mean, I think the only thing we didn't really touch on is, do you do— is new ARR net new or new? Uh, we didn't hit that one yet. Some people like to say, well, wait a minute, we shouldn't calculate this just on what sales poured into the bucket, we should do it net of what churned out. And to me, that's a very different metric. So I do not recommend doing that. And again, when I defined it, I called it new ARR, which to me is not net new ARR. It's new ARR, i.e., anything that got poured in the bucket of both flavors, as we talked about. And we use that and compare it to sales and marketing costs or sales marketing expense. So that was the last one I want to touch on, Ray. If you're tempted to do it on net new ARR because you want to know how much it costs to make the water level of the bucket go up, I would recommend looking at burn multiple or— well, is it included? It's kind of indirectly included in CAC payback period. Is it sufficient gross margin? No, it's not actually. So we'll have to come back to that. It's definitely covered by burn multiple.

Well, but you know where it is included? And it's my least favorite SaaS metric of all time. And that is the SaaS magic number because it's, it's current quarter ARR minus previous quarter ARR. Which includes churn and down sells. So if you want to be old-fashioned and do net new ARR, go use Seth's magic number.

Yeah, because when you're doing it on revenue or implied ARR, which is basically subscription revenue times 4, or subscription revenue, when you do it on any of those metrics, it's inherently net new. I agree with you. That's a great call, Ray. Nice catch.

Well, I'm sure we confused a lot of the listeners out there. So one of the things I'd love for you guys to do is if you've got questions, Right, we're going to talk about how PLG and free trials impacts CAC for the next episode. Send us an email message to sastalkpodcast@gmail.com. You can ask us to clarify anything we talked about on a previous episode or have us talk about in the next episode. Hey Dave, thank you so much for joining me, CAC.

Thanks, Growth.

See you next time.

Okay, and to the listening audience, if you're enjoying this banter back and forth and Dave and I are still trying to perfect how we're going to do SAS Talk. So this was definitely our improvisation kind of technique, which I actually really like because it lets Dave and I really be ourselves. But go ahead and subscribe to SAS Talk with the Metrics Brothers in your favorite podcast app. Go ahead and give us that 5-star rating because it amplifies the reach to your industry peers and colleagues. And give us any recommendations on how we can make the show any better. Thank you to the listening audience. And thank you, CAC. Thank you.

Thank you. The Metrics Brothers: AI, SaaS, and More is a production of The Metrics Brothers Growth and CAC and a member of the Benchmarkit Podcast Network. By accessing this podcast, you acknowledge that The Metrics Brothers make no warranty, guarantee, or representation as to the accuracy or sufficiency of the information provided or the humor content of the jokes told. Ray, information, opinions, and recommendations presented are, according to our spouses, probably wrong and provided for information purposes only. This podcast should not be considered professional or, for that matter, unprofessional advice. We disclaim any and all liability for any direct, indirect, indirect, misdirect, incidental, special, ordinary, consequential, inconsequential, or other damages arising out of any use of, or God help you, reliance upon the information presented here. Ray Grothreich is based in New York City and available on X @rayreich. Dave Kellogg is based in Silicon Valley and available on X Kellogg. Schedectity, which is French for unspellable, is not our actual production location. Thanks for listening.