Drop CAC, Measure RAC

What Is RAC?

Revenue Acquisition Cost, or RAC for short, is a more detailed approach to revenue identification. For years we've been calculating CAC (Customer Acquisition Cost) and have used it to compare to CLTV (Customer Average Lifetime Value) to be sure we have a profitable ratio. Typically speaking a 3:1 ration of CLTV to CAC is considered profitable. That's because we have to take into account not only the CAC overhead cost to the business, but also the operational overhead expense (Support, Delivery, Onboarding, etc.) throughout the rest of the customer lifecycle. Thus we end up with about a 3 to 1 ratio to be sure your company is profitable on an average set of customers.

However, with RAC, we take it another step. It's not good enough just to understand CAC for a given customer...because not all revenue is created equal. There are 5 revenue streams in all, and each has a different acquisition cost than the others. Thus we should be tracking a RAC across these revenue types...then for any given customer we can identify what types of revenue they have, and from there we know and truly understand if we're profitable with that customer.

What Types Of Revenue Exist?

A layman's terms explanation (so I can understand it):

1) Net New Revenue = First time this person bought this thing.

2) Renewal Revenue = Subsequent times this person buys at least some of the same thing.

3) Upsell Expansion Revenue = Same person (or company) buying more of the same thing.

4) Cross-Sell Expansion Revenue = Same person (or company) buying other things.

5) Advocate Referral Revenue = A new person (or company) buying a thing, because the first person (or company) loved it and told them about it.

The concept of a Customer Success Qualified Lead (or CSQL) would include numbers 3, 4, and 5 above. Meaning Customer Success has a direct impact on not only #2 (Renewal) revenue...but as (or more) importantly...we impact 4 of the 5 revenue streams.

This is why tracking RAC is so vitally important for CS Leaders. To calculate our overall revenue impact, and how profitable that revenue is for our company, we need to track RAC. That show's the TOTAL REVENUE IMPACT we had, not just part of the picture.

What RAC Applies For Each Type?

Without understanding your specific business details, I can't provide hard and fast numbers. But I can outline some ratios and address that of the relative revenue available, here's how the stack up in terms of RAC.

1) Net New Revenue = Most Expensive RAC

2) Renewal Revenue = Least Expensive RAC

3) Upsell Expansion Revenue = Middle Tier RAC

4) Cross-Sell Expansion Revenue = Middle Tier RAC

5) Advocate Referral Revenue = Middle To Least Expensive RAC

When Does Each Type Happen?

Here's a typical Land/Expand sales funnel, to help illustrate.

1) Net New Revenue is when the customer goes through Marketing (Red Top), Sales (Green Top), and into Post Sales (White Bottom).

2) Renewal Revenue is at the very bottom of the funnel. After we Activate the customer (Onboarding), Optimize the customer (Best Practices, Value Realization), and deliver the 3 D's Of Customer Success (https://www.dhirubhai.net/pulse/3-ds-customer-success-aaron-thompson/)...Renewal becomes a byproduct of the customer lifecycle. Just another natural stage of their journey.

3) Upsell Expansion Revenue is when the customer purchases either more of the same thing, or a more expensive version of that thing. And it's visualized by the funnel getting larger at the bottom. It can happen at any point in the customer lifecycle, and typically takes place after at least one renewal has taken place.

4) Cross-Sell Expansion Revenue is when the customer buys other things. These things may go with, or compliment the first purchase...or be completely standalone. Either way. But if your customer is now paying you for 2 things...where before they only paid you for one...you have a successful Cross-Sell.

5) Advocate Referral Revenue is when your customer goes out and sells for you! They speak highly of your company and product in public. The person they speak with is a referral lead. That referral comes in a "side door" of the top of your funnel. Meaning you didn't have to market to that lead, and they found out about you via a current (or past) customer referral. This is the cheapest RAC for Net New revenue...and the key to 'exponential growth.'

In Summary

The most advanced and innovative leaders in Customer Success are starting to track not only CAC, but also RAC. We can then use that data, and the various insights this brings, to help paint the overall revenue picture and our overall impact on it. Not all revenue is created equal and it's important for us to recognize that when truly measuring our effectiveness on the all mighty bottom line.

#CustomerSuccess #CCO #CRO #Revenue