CAC Payback Period

What is CAC Payback Period?

First, CAC stands for Customer Acquisition Cost or how much a company has to spend to acquire a customer. So, to put it simply, the CAC Payback Period is the amount of time it will take for a company to recoup the money they invested to acquire a customer.

CAC Payback Period is an important metric because it helps a company (and investors) know how much money is needed to continue growing. A company with a payback period of 3 months will be able to make back their investment quickly so they can re-invest in more growth without an enormous strain on their cash runway. However, a company that has a payback period of 15 months will face a large cash burn in order to continue investing in future growth at the same rate or will have to lower the amount being invested in growth.

How to Calculate CAC Payback Period

Before you can calculate CAC Payback Period, you have to calculate CAC and ARPA.

Customer Acquisition Cost (CAC)

  • The total sales & marketing expense is important. This should include all salaries, bonuses, advertising spend, software, etc.

  • The number of acquired customers would be the total new customers that joined in the same month.

  • Now, divide the total expense by the total number of new customers and this will give you the cost to acquire one new customer.

Formula: Total Sales & Marketing Expense / # Acquired Customers = CAC

Average Revenue Per Account (ARPA)

  • New Monthly Recurring Revenue (MRR) is the total of the monthly subscription price that the newly acquired customers will be paying each month.

  • The number of acquired customers would be the total new customers that joined in the same month.

  • Now, divide the new MRR total by the total number of new customer and this will give you the average revenue per account.

Formula: New Monthly Recurring Revenue / # Acquired Customers = ARPA

CAC Payback Period

  • CAC is how much it cost to acquire a new customer.

  • ARPA is the average revenue per account

  • The Recurring Gross Margin % is how much revenue is left after subtracting out the COGS or cost to support that customer, which includes support, customer success, servers, operations, etc. To get the gross margin subtract COGS from total revenue and then divide the gross margin into total revenue to get the percentage.

  • Now, multiply your APRA by the gross margin % and then divide your CAC by that number.

Formula: CAC / (ARPA X Recurring Gross Margin %) = CAC Payback Period

Real Examples

Last month, your company posted the following stats.

  • Total Sales & Marketing Expense - $135,000

  • Acquired Customers - 85

  • New Monthly Recurring Revenue - $22,200

  • Total Revenue - $486,000

  • Total COGS - $87,000

With this information, we can run all of the necessary formulas to calculate the CAC payback period.

CAC
$135,000 / 85 = $1,588

ARPA
$22,200 / 85 = $261

Recurring Gross Margin
$486,000 - $87,000 = $399,000
$399,000 / $486,000 = 82%

CAC Payback Period
$1,588 / (261 * 82%) = 7.42 months
$1,588 / 214 = 7.42 months

Now with just five metrics, you can calculate how long it will take to recoup the investment made to acquire a customer. Since all of the inputs for CAC payback period are dynamic and evolving over time, it is important to calculate it on a monthly basis and plot it over time to understand the trend rather than just a point in time.

Nate Turner