Nothing in business is free, right? So, it’s safe to say that when it comes to acquiring customers, you may need to pay in order to convince them to buy your service. . The old adage, spend money to make money, couldn’t be more true when it comes to CAC for SaaS firms.
But, a good business is a profitable business and maintaining profitability means ensuring that you’re not spending more on acquiring your customers than what they’re paying you.
First things first, CAC, or customer acquisition cost, is that upfront cost associated with each of your customers and how you acquire them. It can range from the ads you’re running online to the salaries of your marketing team. Calculating your CAC means adding up all those expenditures and dividing them by the number of new customers for the period. Voila! CAC determined.
But that’s not enough
If you think about your CAC as money spent like an investment in your future customers, like all good investors, you’ll want to earn your initial investment money back. Here’s where your CAC Payback Period benchmark comes in really handy.
The CAC Payback Period is the number of months it takes for your company to earn back what was spent on acquiring your customers. Think of it as your break-even point and a great indicator of how much cash the company needs in order to continue growing…profitably.
Calculating the cost
In order to calculate your CAC Payback period, you’ll need to know your CAC, ARPA (Average Revenue per Account) and Gross Margin percent. From there, you’ll divide your CAC by your ARPA multiplied by Gross Margin percent:
CAC / [ARPA X Gross Margin Percent] = CAC Payback Period
Why is it important?
Good question. Understanding this key benchmark will not only help you determine how much cash flow you will need to be profitable, but may also indicate the need for cutting costs in the marketing funnel if the payback period is long and users are churning before you’ve earned that initial investment back.
Generally, the average SaaS startup has a CAC Payback Period of around 12 months, with 5-7 month CAC Payback Periods for very high performing firms. But most importantly, utilize your CAC Payback Period metric as a means to measure what’s working and what’s not working in your marketing funnel. It can be a signal for more experimentation or a sign that you’ve hit your sweet spot and that things are running smoothly within the company.