CAC payback is a key metric that grabs the attention of investors. This metric reveals how effective your marketing and sales efforts are. Let’s break it down: what CAC payback is, how to calculate it, and why it matters.

👁 What is CAC payback?

The CAC payback period is the time it takes to recover the cost of acquiring a new customer. Marketing spending, SEO, and events, all play a role. Simpler methods like social media might have shorter payback periods, while extensive campaigns like mailers and billboards take longer.

🕵🏻‍♂️ How to calculate CAC payback

To calculate the CAC payback period, divide the total CAC by the product of average revenue per user (ARPU) and gross margin. This formula shows the time needed to recover the CAC based on the actual profit from each customer. By using the product of ARPU and Gross Margin, you ensure that the payback period reflects the real financial contribution of each customer, leading to more accurate financial planning and strategy.

CAC payback period = CAC / (ARPU × gross margin) 

For example: Suppose your ARPU is $100, your gross margin is 60% (0.60), and your CAC is $200. The effective earnings from each customer, considering the gross margin, are:

Effective earnings = ARPU × gross margin = 100 × 0.60 = $60

The CAC payback period is then:

CAC payback period = $200 / $60≈3.33 months

In this example, it takes approximately 3.33 months to recoup the cost of acquiring a new customer, considering the profitability after direct costs.

🪐 Why the CAC payback period is important

• Identifying overspending. The CAC payback period keeps your growth realistic. New subscribers might be increasing, but if the cost to acquire them is skyrocketing, the payback period stretches out. Gaining 10,000 new subscribers looks impressive, but if acquisition costs have multiplied by 10, it takes 10 times as long to break even. The payback period shows you when things are off track.

• Spotting retention and churn issues. In a traditional sale, the cost of goods sold and profit are recovered in a single transaction. In SaaS, customers sign up for subscriptions, generating recurring revenue. This model allows lower upfront fees but risks not recovering sales and marketing costs. Measuring your CAC payback period can highlight retention and churn issues. If customers drop their subscriptions before the payback period, you’ve got a problem. High churn means you need to keep acquiring new customers just to stay afloat. Look for patterns among those who churn. If certain channels see customers leaving after six months, find out why.

• Getting your pricing right. Creating the right pricing structure is all about experimentation. If your CAC payback period is too long, your product might be priced too low. Try increasing prices or introducing premium tiers. Conversely, if the product is priced too high and conversions are low, the CAC payback period will also be high.

• Informing your marketing strategy. The CAC payback period is a great way to assess your marketing efforts. If the payback period is too long, it might indicate overspending on marketing or targeting the wrong market. Poorly converting ads are a common cause of high CAC. A change in strategy can significantly reduce the cost of acquisition and the payback time. Break down the CAC payback period by different marketing channels. If YouTube ads bring in more customers at a lower CAC, focus more on that channel. Adjust campaigns that aren’t converting well to improve ROI.