It’s too long if you are bootstrapped (you don’t have a year) and too short if funded and NRR > 100%
— Jason ✨BeKind✨ Lemkin ⚫️ (@jasonlk) August 19, 2021
There are two great SaaS companies I’m working with right now. Both have a sales-driven process, selling to SMBs. Both have a CAC payback that is very short — around 90 days. Both have roughly the same number of employees (roughly 50).
One is cash-flow positive. The other is burning a ton of cash. A ton.
How can that be? What are the differences between these 2 seemingly similar SaaS startups selling to SMBs?
- Churn. The higher the churn, the lower your CAC needs to be to survive.
- NRR. The cash-flow positive one has 130% NRR from SMBs and has several years of existing customers to renew. Renewals and 130%+ NRR are very cost-effective drivers of cash flow. It just takes a few years for the power of renewals and a high NRR to really kick in.
- CLTV Measurement. Each of these two startups measures CLTV value differently. Do you include upsells in Year 1? Projected revenue? This can flatter your CAC metrics.
- Including — or not including — customers also acquired for free, in your CAC measurement. If you include customers acquired outside of paid spend, the blended CAC goes way down!
Now, let’s take a look at Jamin Bell of Altimeter Capital’s data. The average public SaaS company has a 25 month CAC payback. That’s over 2 years!
Of course, the public SaaS companies have huge installed bases with no new direct CAC to maintain their existing $100m+ ARR bases. It’s OK if CAC goes up at scale, up to a point, so long as your CLTV is long and your NRR is high. If you are keeping customers for a decade, it’s OK if your 10,000th customer costs a bit more to acquire. The 9,999 before are generating a ton of cash at that point.
Still it raises a question — what is a “correct” CAC these days for startups, especially those without unlimited capital? The reality is the answer is a CAC that fits your revenue plan and your burn rate budget. Zoom is an extreme example. They managed their CAC for paid customers so that their losses were precisely … $0. Put differently, yes Zoom is and was viral and acquired a ton of customers for free. But it also spent a ton on marketing, up to a point. That point was whatever was left so that the company stayed at a 0% operating margin (neither profit, which they couldn’t use at the time, nor losses, which Eric Yuan could afford but didn’t want). More on that here.
I have no magical insights, and we can’t all skate to the puck quite like Zoom did, but working across 30+ growing SaaS companies, here are a few learnings and thoughts:
- In the end, any marketing program that performs is worth it — if your NRR is 100%+. Once churn is under control, almost any marketing program that acquires you happy customers is worth it. Even if the ROI isn’t huge at first, just get better at it. If you are keeping customers for a decade, and your NRR is high, almost any marketing channel that works is worth it.
- Marketing just needs a fixed budget at the end of the day to hit its plan. CAC is a critical metric, but as we see above, it can be gamed quite a bit. Make sure you and marketing agree on a fixed budget to deliver a set amount of pipeline / leads / revenue. Like Zoom, they should spend it as best they can.
- If your burn rate is low, let the CAC grow. If you aren’t burning much, don’t put so much pressure on CAC. Close the customers now.
- If your burn rate is high, your CAC is likely higher than you think. See the above example. Don’t trust a raw CAC number. Dig in to understand what’s really happening if your burn is high. That’s almost always a sign your effective CAC is higher than you think.
- There’s nothing magical to a 12 month CAC. It does have some nice venture math in terms of $$$ invested vs. $$$ out — in theory. But it doesn’t really tie to a burn rate, or NRR, or much of anything. The right CAC is one where you spend on any program that performs, up to a point. And that point is your budget.
Most importantly, as CEO, you have to dig in more. How sales, marketing and digital costs really all interact is confusing. You have to know the budget, know the burn, and know where cash flows. Or you can end up with a sales team that seems efficient, a marketing team that seems to be efficient … and an overall business that is burning way, way too much cash.
I’ve seen it too many times.
A related post here: