CAC Payback Period
What is CAC Payback Period?
CAC Payback Period is the time it takes for a customer to pay 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 CAC Payback Period
What is a good CAC Payback Period benchmark?
Typically, this should be less than 12 months.
More about this metric
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.
Metrics related to CAC Payback Period
Lifetime Value to Cost of Acquisition Ratio
The Lifetime Value to Cost of Acquisition (LTV/CAC) Ratio tells you if the theoretical lifetime reve...
Monthly Recurring Revenue
Monthly Recurring Revenue (MRR) is the sum of all subscription revenue expressed as a monthly value....
Customer Acquisition Cost
Customer Acquisition Cost (CAC) is the cost a business incurs to acquire a new customer. This includ...