Customer Acquisition Cost (CAC) Payback: A Comprehensive Guide

What is the CAC payback period?

The CAC payback period is the number of months it takes to start earning a profit from a new customer. This metric considers how much it costs to acquire a new customer and how much revenue that customer brings in to quantify the amount of time it takes for a new customer to become profitable.

The CAC payback period doesn’t just show you the time period from customer acquisition to profitability. It also helps you develop a better understanding of how different sales cycles or inputs can affect your profit margins. As your business grows, its operating and customer acquisition costs may shrink or expand, so regular monitoring of this SaaS metric is critical.

How to calculate CAC payback period

The baseline CAC payback period formula is fairly straightforward. However, it can be modified slightly to include consideration for your other expenses to provide a broader understanding of your actual break-even point for profitability with new customers.

Baseline CAC payback period

At the simplest level, you can find your CAC payback period using CAC and monthly recurring revenue (MRR): 

CAC Payback Period = Customer Acquisition Cost / Monthly Recurring Revenue

As an example, let’s say it costs $200 to acquire a new customer who’s worth $25 per month. To find your CAC payback period, you’d do the following equation:

$200 / $25 = 8

Outside of any other external costs, your break-even point occurs at 8 months.

CAC payback period with cost of goods sold

Want to take into account your expenses (or cost of goods sold)? To do this, simply include your gross margin percentage in the equation:

CAC Payback Period = Customer Acquisition Cost / (Monthly Recurring Revenue x Gross Margin Percentage)

Let’s continue with the above example where it costs $200 to acquire a new customer, and your average revenue per month is $25. But now we’re adding in your gross margin percentage, which is 80%.

CAC Payback Period = $200 / ($25 x 80%) = 10

In this scenario, your break-even point occurs at 10 months.

SaaS goals for CAC payback benchmarking

When it comes to setting goals around the CAC payback period, the benchmark you should strive for will vary based on your business size. Most SaaS businesses can be profitable with CAC payback periods ranging from nine to 14 months, with the best payback periods ranging from two to nine months.

When considering benchmarking, you have to keep in mind that this metric varies significantly based on your market strategy and target customer persona. Here are some benchmarking details to consider when setting your own CAC payback period goals:

• Smaller businesses generally have shorter CAC payback periods, while larger businesses generally have longer CAC payback periods.

• Customers who bring in significantly higher revenues will have longer CAC payback periods than those who bring in lower monthly revenues.

• The top 80% of SaaS businesses focused on enterprise clients have a nine-month CAC payback period.

Even if your current CAC payback period is above average for your industry or business size, you should always strive to make it even shorter. For more on this, check out our strategies for shortening your CAC Payback Period.

Interpreting your CAC payback period data

Your CAC payback period can help you make better decisions about your company’s growth. It helps you detect overspending, identify issues with customer retention and churn rates, find the best pricing strategies, and evaluate the best marketing strategies.

Costs of business growth

The upfront cost of acquisition for new customers is a significant part of the costs required for your company’s growth. A longer CAC payback period means higher growth costs and potentially slower growth. Conversely, shorter payback periods suggest lower growth costs. To maintain a sustainable trajectory, it’s essential to ensure that your CAC doesn’t outpace company growth.

Instances of overspending

Tracking your CAC payback period (especially when segmented by different customer acquisition channels) can help you identify overspending. For example, if you observe a significant increase in conversion rates and a corresponding rise in new customers, but also notice a disproportionate surge in acquisition costs, it signals a need to investigate and pinpoint the source of excessive marketing expenses. Failing to proactively address such scenarios could harm your payback period and hinder your ability to recover your investment.

Retention and churn issues

The CAC payback period metric also prompts you to think about your churn rate. If you consistently experience customer churn before the end of your CAC payback period, your business won’t be viable. You need to make sure your retention rates don’t undermine the success of your business. Tracking the CAC payback period helps you put these rates into perspective.

Accuracy in pricing strategy

If your CAC payback period is significantly longer than benchmark data recommends, this suggests your prices are too low. But that doesn’t just mean you need to increase your prices; it means you need to adjust your pricing strategy. This may mean shifting from annual subscriptions to monthly, or launching a new multi-tier pricing model. The right answer varies based on your business model and your customers.

Marketing campaign effectiveness

The results of your CAC payback period calculations will inform the effectiveness of your marketing campaigns—namely, your ROI and campaign profitability. This will shed light on your overall marketing strategy, enabling CMOs to identify best practices in high-performing campaigns, budget marketing expenses towards more of those activities and forecast future conversions and revenue.

LTV:CAC ratio vs CAC payback

The LTV:CAC ratio compares the customer lifetime value (LTV) to the customer acquisition cost (CAC). It offers insights into the value of a customer in relation to the cost of acquiring them. While the ideal target for this ratio varies, most SaaS startups and SMBs aim for a 3:1 ratio.

However, relying solely on the average LTV:CAC ratio can be limiting. It becomes more valuable when analyzed by different acquisition channels or customer segments. Therefore, it’s important to use this metric carefully and consider its limitations when making marketing decisions.

On the other hand, the CAC payback period metric can be calculated with less data and provides immediate insights. It’s particularly useful for young startups or early-stage businesses that may have limited customer information. For instance, the CAC payback period can help identify risks in marketing campaigns that may not be evident from the LTV:CAC ratio alone.

One of the key advantages of the CAC payback period is its ability to highlight cashflow bottlenecks you may not find when solely looking at the LTV:CAC ratio. Consider this scenario: if the average LTV is $100,000 and the cost to acquire a new customer is $2,000, resulting in an impressive ratio of 50:1. However, if the CAC payback period is two years, the business may face cashflow challenges during that period. Unless there is sufficient funding to sustain the business without profits, survival becomes uncertain.

By considering both the LTV:CAC ratio and the CAC payback period, businesses can gain a comprehensive understanding of their customer acquisition dynamics and cashflow requirements, and make informed decisions to ensure long-term sustainability.

Calculating and tracking your CAC payback period provides the insights you need to improve your overall profitability. For SaaS businesses, this single metric can help you boost average revenue, improve marketing efforts, and most importantly, drive sustainable growth.

We can help you with this process. Maxio equips SaaS companies with the data they need to make informed decisions. With Maxio, you can ditch your spreadsheets in favor of automated tracking and reporting on your company’s CAC payback (along with hundreds of other SaaS metrics).

Learn more about how Maxio brings order to your financial chaos.