CAC Payback Period
Date created: Feb 12, 2020 • Last updated: Jun 9, 2021
What is CAC Payback Period?
CAC Payback Period is the time it takes for a company to earn back their customer acquisition costs. The value depends on how high the Customer Acquisition Cost (CAC) is and how much a customer contributes in revenue each month or each year.Alternate names: Customer Acquisition Cost Payback Period
How to calculate
Company A spends on average $400 in Sales and Marketing to acquire a new customer. The average new customer generates an MRR of $25 for the company or an ARR of $300 ($25 MRR * 12 months). In this scenario, the CAC Payback Period is 15.96 months or 1.33 years given this calculation: CAC Payback: $400/$300=1.33 years=15.96 months.
CAC Payback Period
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More about this metric
CAC Payback is the single best measure of the efficiency of your go-to-market engine. The shorter the payback period, the better the strategy. Generally speaking, SaaS startups aim to recover their Customer Acquisition Costs (CAC) in 15 to 18 months and high performing SaaS companies normally have a 5-7 month payback.
CAC Payback Period combines three fundamental metrics to help you understand earnings from your customers: Customer Acquisition Cost (CAC), the all-inclusive marketing and sales cost you spend in a period, new Monthly Recurring Revenue (MRR), that which is acquired from new customers in the period, and your overall Gross Margin percentage (GM%)
Note that CAC Payback Period does not factor in churn. It assumes that you will see a return on your customer acquisition cost during the lifetime of your customer (before they could, theoretically, churn). For this reason, it's important to also monitor your LTV:CAC Ratio. Customers who churn within the CAC Payback Period are costing you.
Understanding CAC Payback Period helps you decide how aggressive you should be when acquiring new customers on yearly or multi-year plans vs monthly plans (which typically have a higher churn rate). From a cash perspective, if, on average, it takes you 10 months to recover the cost to acquire a customer, and you are able to sell an annual "paid upfront" plan, then your payback period for that customer is 0 - or instantaneous. It's cash in the bank, that you will not need to finance via debt or equity.