CAC Ratios: The Magical Marketing Budget Benchmarks

By Adam Turinas and Mark Erwich

How do you set a marketing budget based on customer acquisition costs in healthcare technology?

In this post, we will share a new approach that uses the magical powers CAC ratios. We hope this will give you a fresh perspective on what it really costs to acquire a customer and how to justify it to your CEO.

But first, a little trip down memory lane.

B2B Marketing Benchmarks

One of most read blog posts is called B2B Budget Benchmarks. It answers the question, how much should you spend on marketing? In this post, we shared multiple ways of setting budgets based on research by Gartner and others. In short:

• Gartner reports average marketing spending increased from 6.4% to 9.5% of company revenue across industries.
• BDC suggests B2B companies should spend 2-5% of revenue on marketing, while B2C companies typically spend 5-10%.
• HubSpot notes that B2B product industries allocate about 7.8% of their revenue to marketing.
• CMO Council survey finds that B2B companies spend an average of 7.5% of their revenue on marketing.
• A leading VC firm reports companies with >$100M revenue spent 23% on sales and marketing; those with 25% YOY growth spent 29%.
• Gartner’s 2022 report shows that tech product CMOs increased budgets from 5% to 10.1% year over year, with digital accounting for 56% of marketing spending.

These are good places to start, but CFOs often roll their eyes at this type of data.

Let’s talk About CAC Ratios

The CAC ratio compares the cost of acquiring new customers to the revenue they represent for you.

This metric is especially popular among PE and VC firms, who use it to compare their portfolio companies. It has primarily been used to evaluate the cost structures of SaaS firms. As you will see below, I believe it applies to our industry, too.

In her excellent recent article, Carilu Dietrich discusses the importance of CAC ratios in planning your budget. She explains why CAC ratios have been declining and why this has been especially bad for bigger deals. She leans in on the point that most other metrics and benchmarks are considered “fluffy.” CAC ratios win out because they are the cost to win the revenue based on recent past data, not hoped-for conversion rates.

Carilu’s argument was based on recent discussions at SaaStr, where Ray Rike of Benchmarkit presented insights on SaaS market trends, focusing on CAC Ratios. He emphasized two key ratios for CEOs and CFOs to assess acquisition costs across Sales, Marketing, and Customer Success. One ratio combines new and expansion ARR, while the other focuses solely on new ARR. These metrics help determine budget ranges and can vary based on prioritizing new versus expansion ARR.

Rike argues these CAC ratios are more effective than payback period calculations, as they enable direct budget calculations. For example, $25M New ARR at a 1.5 CAC ratio requires a $37.5M GTM Budget.

Source: https://www.carilu.com/p/annual-planning-imperative-cac-ratios

Carilu’s article explains why the tech industry has been struggling so badly over the last year or so.

How Do I Use a CAC Ratio for Budgeting?

Simple really. If the CAC ratio is 1.5 and your average new customer deal has annual recurring revenue (ARR) of $100,000, acquiring each new customer will cost you $150,000 in sales, marketing, and other expenses allocated to new customer acquisition.

Let’s assume that customers churn every five years. Then, your lifetime value is $500,000. The acquisition cost is $150,000; the combined sales and marketing ROI is 3.3X.

Important Data for Healthcare Technology Firms

In his conversation with Carilu, Ray referred to his research on performance metrics data from ~ 1,000 B2B SaaS companies participating in the most recent annual benchmarking research.

He broke out CAC ratios for new deals across different contract values as shown in this chart. Note: Contract values are annual recurring revenue (ARR).

Source: https://www.carilu.com/p/annual-planning-imperative-cac-ratios

This data came from many industries. Healthtech deals are typically on the right side of the chart in the $50,000 to $100,000+ deal size ranges. These are the highest and second-highest CAC ratios, i.e., the most expensive.

The article is based on a larger data model that allows for some specificity: if your solution is a vertical solution, the median CAC Ratio is 1.49.

So, if you are budgeting for 2025 and you have a deal with an average ARR of between $50,000 and $100,000, you should budget $2.30 per dollar of net new revenue in 2025. If your deals exceed $100,000, budget $1.94 per dollar of net new revenue in 2025.

But wait, how do you account for how long sales cycles are?

As Carilu says in her blog:

“Ray generally recommends people run their metric in 5-quarter or 9-quarter increments to see longer-term trends”

Example of This in Practice

Let’s say you have average deals of $110,000 in ARR; use 1.94 as your CAC ratio. And let’s say you have a target of $5,000,000 in net new revenue; your All-in sales and marketing budget should be:

1.94 x 5,000,000 = $9,700,000

If your average sales cycle runs to five quarters, your sales and marketing budget for the year associated to that target is

($9,700,000/5) x 4 = $7,760,000

Let’s say the all-in sales budget has already been set at $3,000,000 for net new sales; marketing is left with $4,760,000.

WARNING! If your sales cycles last more than 12 months, you will need to invest in the target of $5,000,000 in net new revenue in the coming year and the target for the following year.

If your average customer lifetime is five years, the lifetime value of this $5,000,000 in new revenue is $25,000,000. This is roughly a 5X ROI for marketing and 2.5X ROI for sales and marketing combined.

How to Apply This in Your Business

Benchmarks based on a percentage of revenue have limited value. They help explain to management how companies like yours invest, but they give little information on why that budget makes sense and what to expect.

The benefit of using CAC ratios is they help you establish a data-driven foundation for goal setting. Taking last year’s budget and increase it by 5% because the revenue goals increased 5% is too simplistic. This model introduces a broader, more objective perspective to help you project expected outcomes. They can potentially uncover new opportunities for growth and efficiency in your upcoming fiscal year.

If your organization is owned by a PE or VC firm, you may have specific guidelines and goals to achieve. This framework may be more readily accepted than other organizations as a budgeting model. And if you do not have clear guidance, this can help you set budgets based on historical performance.

Analyzing your organization’s CAC, particularly if backed by private equity or venture capital, can provide valuable insights for strategic planning. Utilizing empirical data from industry benchmarks offers a robust framework for setting performance targets. This evidence-based approach can significantly enhance your 2025 budget planning process even without investor-defined objectives.

If you liked this post and want to learn more…

1. Check out more posts like this in the Healthtech MarketingLearning Center. It is chock-full of articles, use cases, how-to’s, and ideas. Check out our resource center dedicated to ABM
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