Customer Acquisition Cost (CAC) payback period refers to the number of months it takes your startup to earn back its investment in acquiring a new customer. In other words, it’s the average time it takes for the net revenue from a customer to equal the cost spent on acquiring them. For example, if a SaaS startup spends $1,000 on marketing to acquire a new customer and earns $100 per month from the customer, the payback period would be 10 months.
VCs and growth-oriented startups continue to focus attention on CAC payback period as one of the best measures of growth efficiency and potential profitability. It offers more actionable insight than measuring CAC alone, which doesn’t give any indication of customer quality or profitability. Similarly, while measuring LTV:CAC is important and valuable, it doesn’t account for the time value of money and the time it takes to recoup cash spent acquiring customers.
What’s a Good CAC Payback Period for My Startup?
A shorter CAC payback period is generally better, as it means the company is recouping its investment quickly, managing cash flow well, and demonstrating a potentially scalable business model. There’s a considerable range for the number of months that constitutes a “good” CAC payback period, generally anywhere from 5-14 months. One of the biggest factors is the size of the target you’re selling into. SMB-focused businesses should expect to be on the shorter end (5-11 months), while businesses selling into mid-market and enterprise organizations are likely to be on the longer end (8-14 months), according to OpenView’s 2022 SaaS Benchmarks Report. Another important factor is Net Dollar Retention (NDR). Startups with 100%+ NDR may be comfortable with longer CAC Payback Periods of 18 months or more, depending on cash flow and other factors.
How to Measure Your Startup’s CAC Payback Period
To calculate the CAC Payback Period, you’ll need to know three key metrics:
- Sales and Marketing Expense: Spending related to sales teams, marketing and advertising campaigns, and similar activities for acquiring new customers.
- New MRR: Monthly Recurring Revenue from new customers during the period.
- Gross Margin: The difference between revenue and cost of goods sold (CoGS). Learn more about calculating gross margin.
The formula for CAC Payback Period is:
CAC Payback Period = Sales & Marketing Expense ÷ (New MRR × Gross Margin)
I like the above formula for its simplicity, but keep in mind there are other good methods available for calculating CAC payback period. Another method to consider is this one from Mosaic, which starts by calculating CAC and dividing it by the difference of your net new monthly recurring revenue (MRR) minus the average cost of service.
CAC payback period isn’t just a number; it’s a mirror reflecting the efficiency of your customer acquisition strategies. A shorter payback period signifies a healthier business model, allowing quicker reinvestment in growth, while a longer period could lead to potential cash flow problems. As a startup, it’s crucial to continually monitor this metric with your CFO, tweak your strategies, and ensure a suitable balance between growth and profitability.