From CAC to TAC – How to calculate your talent acquisition cost?
You're working in a SaaS company, so you are most likely familiar with LTV / CAC ratio.
If not, here’s the short version of it:
LTV = Life-time-value (of a customer)
CAC = Customer Acquisition Cost
The idea behind the ratio is that you can afford to spend more on acquiring new customers if they bring in a lot of money during their lifetime as a customer.
We’re all about stealing stuff from other business functions to Talent Acquisition, and this is one worth stealing.
Do you know your TAC (Talent Acquisition Cost)?
Most companies don’t. It’s a crucial metric because it tells you how much it costs your company to attract the right talent to your company.
Here’s how you calculate it. Take these numbers from the past 12 months:
1. Wages of people participating in talent acquisition. Typically this includes:
- Employer Branding Specialist
- Hiring Managers
- Team members participating in hiring
- Other people participating in hiring inside of your company
2. Total paid media budget you have used for your employer branding & recruitment marketing.
3. Cost of all the software you are using for your talent acquisition e.g .your Application-Tracking-System & LinkedIn Recruiter licenses.
4. All the outside expenses you have used for recruitment e.g. outsourced agents/headhunters, outside agency for Employer branding.
When you calculate these and add them to each other you get the total number of € that you have used for your Talent Acquisition in the last 12 months. Let’s take an example where you get the answer of 480 000€.
Ps. Don’t move forward in reading before calculating that number!
Next, it’s time to see what you are attracted to with that investment. Calculate the number of hires you have made in the past 12 months. Let’s take an example: you have hired a total of 42 people.
Here’s the formula for calculating your TAC (Talent Acquisition Cost):
Amount of money used for talent acquisition / amount of hires
In this case, it would be:
480 000€ / 42 = 11 428,6€
This is how much on average, it costs you to recruit one person.
Of course, there are some recruitments that take more money & some that take less than that, but it’s the average.
Okay, so is that a good or bad number?
This would be the same as asking whether some company's CAC is good or not. You can’t answer that question without looking at the other side of the equation.
Let’s give an example from the Customer-Acquisition-Cost side.
If it costs 5000€ to acquire a new customer, but they bring in 1 000 000€ in revenue most likely, it’s a good deal.
If it costs 5000€ to acquire a new customer but they bring in 5000€ in revenue it’s a bad deal and it’s not scalable.
So let’s check the other side: Life-time-value. I will cut some corners here to make it simple.
There are a few ways for this, but the two main numbers I would check here:
- The average duration of the employment relationship
- Average profitability of an employee per month
From these two, we can calculate the lifetime value of an employee in the big picture.
The first one is relatively easy: Look at your data. What is the average amount of months that a person stays within your company. Typically you will find this number to be from 18 to 36 months on average.
How should you calculate the profitability of an employee per month?
Let’s simplify a bit in this formula:
Your total profits / the amount of people / 12
So e.g., your company is profiting 2 000 000€ a year.
You have 150 employees.
One employee is profiting an average of:
2 000 000 / 150 / 12 = 1111€ / month.
Yes, I know this is cutting corners, and all employees aren’t profitable, and it takes time to become profitable for the business, etc.
Let’s use as an example that the average person stays 22 months in your company.
In that case, the life-time-value would be 22 x 1111€ = 24 442€.
Here are some interesting numbers based on those:
Your LTV to TAC ratio would be:
24 442€ / 11 428,6€ = 2,14
Your TAC payback time would be:
11 428,6€ / 1111€ = 10,3 months (In reality, more because you need to onboard people, and they are not profitable from the beginning).
Still, some fun number games to play and see your numbers!