I had a question though. Some other websites mention the metric CAC Ratio: The CAC ratio provides insight into the ultimate profitability of S&M investments. It is calculated by multiplying new annualized quarterly revenue by gross profit and dividing by S&M expense for the quarter. A CAC ratio of .5 shows that half of the investment is paid back within a year, and assuming low churn, paid back in full in two years.
Is this the same as gross margin adjusted CAC ratio you mention? The calculation was different so wanted to check.
It's very similar! What you mentioned is the magic number. I'm just taking the inverse of this, and then multiplying by 12 so the unit of measurement of the end result is "number of months." I think a 24 month CAC payback is a more digestible number than "0.5 magic number." I'm also using the previous quarters S&M expense. If you really want to dig in on this it's assuming ~3 month sales cycles. What it's saying is the investments you made last quarter on the sales front will turn into closed deals this quarter. If your sales cycles are more like 4-6 months then you should look at the S&M spend from 2 quarters prior. Hope this makes sense!
Great work!! did you do all that manually? quick comment, the quarterly performance vs. consensus graph is flipped for March vs. April (could not find a way to message you)
Very insightful article! Thank you!
I had a question though. Some other websites mention the metric CAC Ratio: The CAC ratio provides insight into the ultimate profitability of S&M investments. It is calculated by multiplying new annualized quarterly revenue by gross profit and dividing by S&M expense for the quarter. A CAC ratio of .5 shows that half of the investment is paid back within a year, and assuming low churn, paid back in full in two years.
Is this the same as gross margin adjusted CAC ratio you mention? The calculation was different so wanted to check.
It's very similar! What you mentioned is the magic number. I'm just taking the inverse of this, and then multiplying by 12 so the unit of measurement of the end result is "number of months." I think a 24 month CAC payback is a more digestible number than "0.5 magic number." I'm also using the previous quarters S&M expense. If you really want to dig in on this it's assuming ~3 month sales cycles. What it's saying is the investments you made last quarter on the sales front will turn into closed deals this quarter. If your sales cycles are more like 4-6 months then you should look at the S&M spend from 2 quarters prior. Hope this makes sense!
If SHOP is included, would love to see CHWY and so PTON.
PTON runs monthly subscriptions. It's like AAPL and is a powerful company(S/W and H/W)
excellent analysis! thanks!
Great work!! did you do all that manually? quick comment, the quarterly performance vs. consensus graph is flipped for March vs. April (could not find a way to message you)