Expansion CAC Ratio
Expansion CAC Ratio Overview
Expansion CAC Ratio measures the amount of fully burdened Sales and Marketing expenses, including Customer Success expenses that is required to generate one dollar ($1) of Contracted Annual Recurring Revenue (CARR) from existing customers via Up-Sells, Cross-Sells or Expansion
Expansion CAC Ratio does include Expansion CARR from up-sells and cross-sells, but does not include the impact of churn on CARR. Expansion CARR is not the same as “Net New ARR”.
Business Value and Insights
Expansion CAC Ratio provides insight into the efficiency of CARR growth from Existing Customers.
Understanding the the Expansion CAC Ratio enables enhance decision making when evaluating increasing investment to accelerate Expansion CARR growth from existing customers.
Expansion ARR includes new CARR from up-sells, cross-sells and contractual expansion of the number of billable units within a subscription agreement.
Capturing the efficiency of expanding existing customer CARR, as measured by Sales and Marketing expenses versus Contracted ARR (CARR) becomes a higher priority as SaaS companies reach $5M ARR and greater, and/or have an up-sells or cross-sell motion in place.
Though the calculation formula below is important, calculating Existing Customer Expansion ARR Growth efficiency for existing customers on a consistent basis is as important as the formula itself.
Fully Loaded Sales and Marketing Expenses allocated to Expansion
Expense Timing Guidance Points¹:
The Marketing and Sales Expenses should be measured for the time period preceding the new ARR by the length of the sales cycle.
Example: If the sales cycle is ~90 days for expansion, then Expansion CAC Ratio for Q2 should be calculated based on Q1 Sales & Marketing expense divided by Q2 Expansion CARR.
Another example: For a company with a sales cycle of ~30 days, then Expansion CAC Ratio would be calculated using Sales & Marketing for the previous month divided by Expansion ARR for the current month.
Data Inputs Required
Data Input #1: Fully Loaded Sales and Marketing Expenses (Allocated CS is applicable)
This data is typically available from the Income Statement.
Data Input #2: Percentage of Sales, Marketing and Customer Success expenses allocated to existing customer expansion
Data Input #3: Existing Customer Expansion ARR
This information is typically available from the Customer Relationship Management Software, Contract Management Platform or Financial Management Platform.
Blended CAC Ratio should be calculated monthly on a rolling basis of 1/3/6/12 months.
Nuances to Consider
Nuance #1: Fully loaded Sales and Marketing Expenses
Sales and Marketing expenses should be fully loaded including variable compensation, bonuses, benefits and any other shared expenses that are allocated to the departments. Sales commissions should be fully burdened up-front.
Nuance #2: Timing of Sales Commissions
If sales commissions represent a meaningful percentage of CAC, a more accurate calculation can be achieved by NOT lagging commission expenses and including them in the same period the new CARR is booked. This is different than current ASC 606 guidance for how Sales Commissions are represented on the Income Statement.
Nuance #3: Customer Success Expense
Customer Success expenses should be factored into Expansion CAC Ratio if Customer Success time is allocated to supporting up-sells and cross-sells in existing customers. The amount factored into Expanded CAC Ratio should be based on an allocation basis equal to the time spent on expanding CARR with existing customers
If questions arise, refer to how Customer Success is allocated to Operating Expenses versus Cost of Goods Sold in your company
Nuance #4: Time period of Expenses versus CARR
The Marketing and Sales Expenses should be measured for the time period preceding the expansion ARR by the length of the sales cycle.
Example #1: If the sales cycle is ~90 days, the Expansion CAC Ratio for Q2 should be calculated based on Q1 Sales & Marketing expense divided by Q2 Expansion CARR.
Example #2: For a company with a sales cycle of ~30 days, then Expansion CAC Ratio would be calculated using Sales & Marketing for the previous month divided by Expansion CARR for the current month.
Sample Calculation #1: Expansion CAC Ratio - 90 Day Sales Cycle
List of Input Values:
Sales and Marketing Expenses allocated to Expansion CARR (91-180 Days ago) = $200,000
Customer Success Expenses allocated to Expansion CARR (91 - 180 days ago) = $100,000
Expansion CARR - Last 90 Days = $500,000
= $.60 Expansion CAC Ratio
$200,000 + $100,000
Links to related Standards
Customer Acquisition Cost (CAC): Click Here
Contracted Annual Recurring Revenue: Click Here