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 (S&M).

The CAC payback period—also known as “Months to Recover CAC”—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 consists of three components:

1. Sales and Marketing Expense (S&M) ➝ The spending related to sales teams, digital marketing campaigns, ad spending, search engine marketing, and related tactics for acquiring new customers.
2. New MRR ➝ The MRR contributed from newly acquired customers.
3. SaaS Gross Margin ➝ The remaining profits after deducting the 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 SaaS gross margin.

Note that there are numerous other methods to calculate the CAC payback, and it is thus important to understand the pros and 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.

For instance, the net new MRR metric – in which the new MRR is adjusted for expansion MRR and churned MRR – could be used instead as the recurring revenue component.

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

Likewise, churned MRR is not related to the company’s new customer acquisition strategies, albeit an outsized rate could raise concerns that new customers are prioritized in lieu of existing customers.

What is a Good CAC Payback Period?

As a general rule of thumb, most viable SaaS startups have a CAC 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 facing 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.