CAC Payback Period
Why it matters
It is the timing partner of the LTV to CAC ratio. The ratio says whether a customer is worth acquiring at all. Payback says how long the cash is out of the business before it comes back. A company can pass the ratio test and still run short of cash if payback is longer than its runway allows. A short payback also lets the same money be reinvested sooner, so growth speeds up without raising more.
How to apply it
- Use fully loaded acquisition cost: advertising, sales and marketing salaries, tools and commissions, divided by the new customers won.
- Use gross margin, not raw revenue. Revenue ignores what it costs to deliver the product.
- Track it by channel. One channel can repay in months while another takes years.
- Compare against the stage and contract type. Many teams aim for under twelve months with small-business customers and tolerate longer with large, sticky contracts, but these are rules of thumb.
- Note that customers paying a year upfront repay their acquisition cost in cash on day one, even when the gross margin calculation says several months.
What it is
CAC payback period divides the cost of winning a customer by the gross profit that customer brings in each month. The formula is acquisition cost divided by monthly revenue per customer multiplied by gross margin.
Say a business spends 3,000 euros to win a customer who pays 250 euros a month. Its gross margin is 80 per cent, so each month leaves 200 euros after the direct cost of serving them. Payback is 3,000 divided by 200, which is 15 months.
Common mistakes
- Leaving out the salaries of the people who win the customers.
- Ignoring churn. A customer who leaves before month fifteen never repays the cost.
- Blending every channel into one average that hides the expensive ones.
