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Nothing in business is free, and acquiring customers can come at a pretty penny.
Acquiring customers often includes a variety of different expenses, including costs involved with:
- Creating and hosting a website
- Generating landing pages
- Utilizing marketing software, including email marketing, graphic design, and keyword research software
- Utilizing sales software, including CRMs, pipeline management software, and proposal software
- The salaries of your sales and marketing teams (including external team members and freelancers)
- Ad spend from PPC campaigns, sponsored placements, and more.
That’s just a small snippet of the costs associated with acquiring new customers. And while Customer Acquisition Costs (CACs) are straight-up unavoidable, it is important to track how long it takes to earn those costs back in revenue.
That’s what we’re going to discuss today: Your Customer Acquisition Cost (CAC) Payback Period.
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What is Customer Acquisition Cost (CAC) Payback Period?
First: Your CAC details the costs associated with acquiring new customers. Your average CAC tells you how much it costs, on average, to acquire a single customer.
Your Customer Acquisition Cost (CAC) Payback Period, therefore, is the time it takes on average to earn back the costs you spend to acquire the customer through revenue. In many cases, this is done by looking at the number of months it takes for your company to earn back those costs.
Why Does CAC Payback Period Matter?
Your Payback Period essentially tells you how long it will take to reach a break-even point for each customer acquired.
This is more than just about eagerly awaiting revenue (though more money in the bank is always a plus); knowing your CAC Payback Period is essential to monitor cash flow, too.
Brands can scale their acquisition budgets up and down as needed, and it’s important to make sure you’re not going too big too fast to the point where you’ll be caught in a tight cash flow situation until you make that revenue back.
Knowing how long it takes on average to see a return on your acquisition costs can help you pace your acquisition spend as needed to maintain the overall financial health of your organization.
This metric is not only useful for cash flow purposes, it’s also a great indicator of how much cash your company needs to continue growing.
It can also provide insight into how quickly your customers are profitable.
How to Calculate Your CAC Payback Period
Before you calculate your CAC Payback period, you’ll need to calculate a few other metrics first.
- Calculate your CAC by adding your total sum of acquisition costs in a set period and dividing them by the number of acquired customers during that time period.
- Calculate your Average Revenue Per Account (ARPA) by dividing your total amount of revenue earned in a set time period by the average number of users during that time period.
- Calculate your Gross Margin percent by dividing your gross profit by your revenue, and then multiplying that figure by 100x.
Once you have these figures (which a subscription-focused revenue analytics tool like Baremetrics can help with!), you’ll use this formula to calculate CAC Payback Period:
CAC / [ARPA X Gross Margin Percent] = CAC Payback Period
What is the Average CAC Payback Period?
The average CAC Payback Period varies from business to business, so there isn’t a single “good” Payback Period to hold as a gold standard.
In general, the average SaaS startup has a CAC Payback Period of around 12 months, though high-performing and fast-growing startups may see CAC Payback Periods of around 5-7 months.
When you’re first starting out, your Payback Period will likely be longer. As you run more tests, find the right pricing models and price points for your product, and identify your ideal customer profiles (ICPs), your Payback Period will likely decrease.
What Does a Long CAC Payback Period Mean?
A long CAC payback period isn’t necessarily a bad thing, especially since the definition of “long” varies depending on who you’re asking.
Some businesses will just naturally take longer to make enough profit to recoup those early acquisition costs— especially if the acquisition costs were particularly steep to begin with.
A long Payback Period may indicate that some changes or optimization may be needed, such as finding ways to increase the average subscription plan or targeting higher-value audiences. You also may need to reduce marketing expenses or find ways to move customers through the pipeline faster.
As a note, however, the longer the Payback Period, the higher the financial risk for your business.
You need to look at average customer lifetime values (LTVs) and churn rates to get an understanding of whether or not customers are retaining long enough for you to not only break even but earn a real profit.
If your CAC Payback Period is a year but you lose 10% of newly acquired subscriptions right before that year mark, that’s a cause for concern. You’re not only not making a profit, you’re not even breaking even on those particular customers.
Make sure that your Payback Periods are ahead of your average churn rates, and that customers are retaining long enough that you’re earning that revenue back. If not, it’s time to make some changes.
You can, for example, use tools like Baremetrics to look for red flags that could indicate churn so your team can intervene in advance. Our Recover feature helps identify and prevent failed payments before they happen, keeping customers engaged and retained that may have otherwise been a lost source of revenue.
Final Thoughts
In order to accelerate revenue and company growth (and to minimize potential cash flow bottlenecks), it’s important to accurately track and understand your CAC Payback Period.
Baremetrics’ reliable data and detailed insights can help you not only track your CAC Payback Period but also spot potential ways to reduce it. Get the information you need to make more revenue faster today.
Ready to reduce your CAC Payback Period with accurate data? Get started with a free 14-day trial of Baremetrics now.
