The number of months to earn back the CAC you spend to bring in new customer recurring revenue
What is it about?
The CAC payback period is a short-term measure and should be considered alongside the lifetime value (LTV) of a customer. LTV is the total amount of revenue that a customer will generate over the course of their relationship with your company. If the LTV of a customer is significantly higher than the CAC payback period, it may be worth investing more in acquiring new customers. Measuring the CAC payback period is important for a SaaS company because it helps to track the efficiency of your sales and marketing efforts and identify areas for improvement. It can also help you make informed decisions about your marketing budget and allocate resources to the most effective channels or campaigns.
How to calculate?
To calculate the customer acquisition cost (CAC) payback period in a SaaS (software as a service) company, you can use the following formula: CAC payback period = CAC / (MRR / customer) This will give you the number of months it takes for the revenue generated by a new customer to cover the cost of acquiring that customer. Here's an example of how to calculate the CAC payback period: Let's say your CAC is $1,000 and your monthly recurring revenue (MRR) per customer is $100. Your CAC payback period would be:
CAC payback period = $1,000 / ($100 / customer) = 10 months
What a good payback period looks like
Benchmarks vary by who you sell to, so judge yours against companies with a similar customer size, not against a single industry average. Maxio reports that most SaaS businesses run a profitable CAC payback period of nine to 14 months, and the best run two to nine months (Maxio). The same source breaks it down by target customer.
| Target customer | Good payback (50th percentile) | Great payback (80th percentile) |
|---|---|---|
| Very small business or prosumer | 9 months | 2 months |
| Small business | 7 months | 4 months |
| Midmarket | 14 months | 7 months |
| Enterprise | 14 months | 9 months |
Source: Maxio. Companies selling to enterprise customers sit at the longer end, because larger deals take longer to earn back even when the deal is healthy.
Common ways the number gets distorted
The most common mistake is the denominator. Ben Murray of The SaaS CFO defines the metric as CAC divided by the gross margin dollars a customer brings in, not the raw revenue (The SaaS CFO). If you divide by revenue instead of gross profit, you make the payback look faster than it really is, because the cost to serve the customer never gets counted. A customer paying $100 a month at an 80 percent gross margin only pays back $80 a month against the CAC.
The second mistake is mixing the wrong costs with the wrong customers. The cost on top of the formula should be the cost to win new customers only, not the blended cost across everyone you already have. The SaaS CFO also notes that the basic formula ignores churn and the time value of money, so a long payback is riskier than it looks (The SaaS CFO). Track payback next to churn and net retention, the LTV:CAC ratio, and customer lifetime value, since a short payback paired with heavy churn still drains cash. This is the heart of capital-efficient growth.
Frequently asked questions
What's a good CAC payback period?
It depends on who you sell to. Maxio puts the profitable range at nine to 14 months for most SaaS companies, with the best between two and nine months (Maxio). Smaller-deal businesses earn it back faster. Enterprise sellers take longer because the deals are bigger.
How do you calculate payback period based on CAC?
Divide the cost to acquire a customer by the gross profit that customer brings in each month. Ben Murray of The SaaS CFO uses gross margin dollars, not raw revenue, so the cost to serve the customer is counted (The SaaS CFO). The result is the number of months to break even.
Related
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