As a SaaS company, your customer acquisition costs (CAC) are crucial to monitor and improve. Why? Because the higher your CAC, the longer it will take for you to earn back that money from customers in the form of revenue. This is known as your CAC payback period.
Ideally, you want a short payback period so that you can quickly start making a profit from new customers. But if your CAC is too high, it could be eating into your profits and putting strain on your business. That’s why it’s important to calculate your CAC payback period regularly and work on ways to lower it over time.
CAC Payback: Recovering Customer Acquisition Costs
CAC payback is the process of recovering the customer acquisition costs (CAC) of a business through revenue generated from customers. The goal is to earn enough revenue from customers to offset the costs of acquiring them in the first place.
This can be done through a variety of means, such as charging customers a higher price than it costs to acquire them, or by providing them with value-added services that generate additional revenue.
What is CAC Payback?
CAC payback is the time it takes for your customer’s acquisition cost to be repaid. This tells you how long it will take until your investment in each customer is recovered.
It’s no surprise that you want this period to be short, as it will help your business to grow.
Faster CAC Payback = More Growth!
Once you reach the CAC payback point, all future customers will be contributing to your growth and revenue.
CAC payback can also be known as Time to Recover CAC or Months to Recover CAC.
No matter the size of your business, the thrill, and satisfaction of landing a new account never fade. Always take the time to celebrate the victories, no matter how small.
It’s important to understand the cost of acquiring new customers (CAC) and the period it takes for a new client to pay for itself (the payback period). Once you reach that point, you can really start celebrating your success.
But how long does it take for you to recover your CAC?
How to Calculate CAC Payback Time
CAC payback is an essential metric that measures how long it will take your business to recoup the expenses associated with acquiring a customer.
To calculate this metric you need to understand your CAC, MRR, and gross margin percentage.
CAC Payback Formula (CAC / Avg MRR * Gross Margin%)
Let’s take a look at an example.
Let’s say it costs you $250 to acquire a customer, and they’re paying you $25/month. You need that customer to stay with you for at least 10 months for them to pay back the amount you spent to acquire them.
If that customer churns within those 10 months, you have not made a profit off them.
Let’s say it only costs you $100 to get the same client, you would break even in just 4 months.
While you can simplify the CAC calculation, you may want to have different CAC paybacks for different customer types, depending on their acquisition strategy.
For instance, customers you acquire through trade shows may be much more expensive to acquire than customers who sign up to receive email newsletters from you.
Why CAC Payback Is Important
Understanding the CAC payback ratio is essential to understanding cash flow.
If you’re not familiar with both CAC and CAC payback, you may be spending more money than you need to on acquiring customers. Having a strong grasp of these metrics is essential for making good marketing decisions.
A long pay-back period can be a sign the acquisition model is inefficient and needs improvement.
CAC payback is important because it provides context for other relevant metrics, such as the lifetime value of your customers (LTV) and the LTV:CAC ratio.
By understanding how CAC payback affects these metrics, you can make more informed decisions about your acquisition strategy.
CAC Payback Benchmarks
A good CAC payback time is generally between 5-12 months.
The 12-month rule is a rule of thumb for early-stage startups. However, as your company grows and adapts, your 12 months may change.
Large companies may spend a longer time recouping their CAC, but growing businesses shouldn’t see this as a negative.
How to Shorten the CAC Payback Period
As your business grows, every dollar matters. Keep this thought in the back of your mind as you work on reducing CAC.
Reducing your CAC will also reduce your CAC payback.
It’s important to consider the return on your investment (ROI) when deciding on your marketing budget. Cut these expenses without thinking of how it will affect your bottom line, and you could end up doing more harm than good.
If you’re not spending any money on customer acquisition, then you won’t have any new customers to compare against.
The goal is to make acquiring new customers as cheap as possible, while still growing the company. This can be achieved by reducing how much it costs to acquire each customer. Doing so will reduce the time that it takes the customer to “recoup” that cost.
Double-Down on Less Expensive Acquisition Channels
If you’re spending most of your money on ads when most of your high-quality leads are generated through sponsored posts on LinkedIn, you’re not getting the best return on your investment. Instead, focus your advertising dollars on where you’ll get the most return.
Don’t Forget About Your Current Customers
It’s important to focus on customer retention to recoup your CAC. Keeping current customers satisfied is just as crucial as acquiring new ones. This can be done through monthly check-ins to gauge product performance and open communication channels in case something does go wrong.
Reduce Your CAC Payback Period
Your pricing strategy effects the amount of time it takes for your customers to pay back your CAC. A higher initial price from customers can speed up the time it takes for them to pay you back. Any changes to your pricing structure will have an impact on both your CAC and your payback period.
How pricing impacts your acquisition costs depends entirely on how your pricing model works. It’s important to understand exactly how your model will work before implementing any changes.
Why CAC Payback is Important for SaaS Companies
CAC payback is a KPI for software companies that measures how effectively a company is monetizing its customer base. By laying the groundwork for understanding the break-even point of customer acquisition, CAC payback allows companies to clearly understand their customers and how to best cater to them.
CAC is the total cost of acquiring a client. Even if that new client doesn’t stick around, you have to pay back the investment you made to get them.
If customer retention is poor, then it means more money is being spent on CAC (customer acquisition costs). This then puts a heavy burden on new customer acquisitions to make up for any lost (churned) CAC. It’s a domino effect of bad business.
This “credit”, which comes from sales, directly connects to the companies’ cash flow, which limits the marketing and sales teams’ ability to grow the company.
Any money you spend on acquiring customers could be spent elsewhere, such as on product improvements or hiring more employees.
Consistency in CAC is very important for software as a service (SaaS) businesses because it gives them a way to measure how successful their marketing and sales efforts are. It also helps them decide how to allocate their budgets, including whether to increase spending on paid advertising or target specific audiences.
CAC Payback shows investors that you know how to turn leads into paying customers, and where to reinvest the revenue from those sales.
As a company matures, how it calculates customer acquisition costs (CAC) may change. Murray explained that early on, a company might assume that 100% of sales and marketing expenses go towards acquiring new customers or users.
However, as the company develops different ideal customer profiles (ICPs), it may make more sense to calculate CAC by ICP. This allows for a more targeted and accurate assessment of how much it costs to acquire customers within each demographic.
Cohort Analysis can help you determine how CAC is trending, or identify what needs to be improved.
Why split CAC payback periods this way? By calculating your CAC from several different angles, you ensure you’re not being misled by any one method. This helps you calculate your CAC more accurately.
If your CAC is draining your profit margins, it may be time to reevaluate your CAC payback. This is the time it takes for you to recoup the cost of customer acquisition. By calculating and improving your CAC payback period, you can ensure that your business is performing as efficiently as possible.