Wall Street Prep

CAC Payback Period

Guide to Understanding the CAC Payback Period

Learn Online Now

CAC Payback Period

How to Calculate the CAC Payback Period

The CAC payback period is a SaaS metric that measures the time it takes a company to earn back their spending on new customer acquisitions, namely their sales and marketing expenses.

The CAC payback period is also known as the “months to recover CAC”.

The metric determines the amount of cash necessary for a company to fund its growth strategies, i.e. it sets the ceiling for how much can be reasonably spent on acquiring new customers.

The CAC payback period formula is comprised of three components:

  • Sales and Marketing Expense (S&M): The spending related to sales teams, digital marketing campaigns, ad spend, search engine marketing and related tactics for acquiring new customers.
  • New MRR: The MRR contributed from newly acquired customers.
  • Gross Margin: The remaining profits after deducting cost of goods sold (COGS) from revenue – specific to the SaaS industry, the largest expenses are usually hosting costs (i.e. AWS platform) and onboarding costs.

CAC Payback Period Formula

The CAC payback formula divides the sales and marketing (S&M) expense by the adjusted new MRR acquired in the period.

Formula
  • CAC Payback Period = Sales & Marketing Expense / (New MRR * Gross Margin)

Note that there are numerous other methods to calculate the CAC payback and it is important to understand the pros/cons of each approach, but normally the differences are related to the level of granularity needed (i.e. being as precise as possible vs. rough “back-of-the-envelope” math).

Often, the net new MRR is used, in which the new MRR is adjusted for churned MRR.

For the net new MRR, the inclusion of expansion MRR is a discretionary decision, as those are not necessarily new customers, per se.

How to Interpret CAC Payback (“Months to Recover CAC”)

As a general rule of thumb, most viable SaaS startups have a payback period of fewer than 12 months.

  • Lower Months to Recover: The lower the payback period, the better off the company should be from a liquidity (and long-term profitability) standpoint. If an excessive burn rate stemming from overspending on customer acquisitions is coupled with an insufficient return – i.e. a low LTV/CAC ratio – either the company must allocate less of its budget to customer acquisitions or raise additional capital from investors.
  • Longer Months to Recover: The longer it takes a company to recover its CAC, the greater the risk of losing its upfront investment and face eventual insolvency due to the inefficiency of customer retention (i.e. high churn) and lost profits.

However, the CAC payback period must be evaluated in conjunction with more data points regarding customer types, revenue concentration, billing cycles, working capital spending needs and other factors in order to determine a company’s viability and whether its payback period can be considered “good” or not.

CAC Payback Period Calculator – Excel Model Template

We’ll now move to a modeling exercise, which you can access by filling out the form below.

Submitting ...

CAC Payback Period Calculation Example

Suppose that a SaaS startup spent $5,600 in total on sales and marketing in its most recent month (Month 1).

The result? A total of 10 new customers – i.e. paying subscribers – were acquired by the sales and marketing team that same month.

The customer acquisition cost (CAC) is $560 per customer, which we calculate by dividing the total S&M expense by the total number of new customers acquired during that period.

  • Sales and Marketing Expense (S&M) = $5,600
  • Number of New Customers = 10
  • Customer Acquisition Cost (CAC) = $5,600 / 10 = $560

The next step is to now calculate the average net MRR using the assumption that the new MRR for April was $500.

Since there were ten new customers, the average new MRR is $50 per customer.

  • New MRR = $500
  • Average New MRR = $500 / 10 = $50

The only remaining assumption is the gross margin on the MRR, which we’ll assume to be 80%.

  • Gross Margin = 80%

We now have all the required inputs and can calculate the company’s CAC payback period as 14 months using the equation shown below.

  • CAC Payback Period = $560 / ($50 * 80%) = 14 Months

CAC Payback Period Calculator

Step-by-Step Online Course

Everything You Need To Master Financial Modeling

Enroll in The Premium Package: Learn Financial Statement Modeling, DCF, M&A, LBO and Comps. The same training program used at top investment banks.

Enroll Today
Comments
guest
0 Comments
Inline Feedbacks
View all comments
Learn Financial Modeling Online

Everything you need to master financial and valuation modeling: 3-Statement Modeling, DCF, Comps, M&A and LBO.

Learn More
X

The Wall Street Prep Quicklesson Series

7 Free Financial Modeling Lessons

Get instant access to video lessons taught by experienced investment bankers. Learn financial statement modeling, DCF, M&A, LBO, Comps and Excel shortcuts.