No matter the size of your business, acquiring new customers is something to celebrate! This is particularly true for early-stage companies looking to acquire their first 10, 100, 1000 customers.
However, it's just as important to understand the Customer Acquisition Costs (CAC) and how long it will take to recover those costs in the form of customer revenue. That is CAC payback. It's the real milestone that deserves celebration because once a customer has stayed with your businesses through the CAC Payback Period, you’re closer to making profit on a unit economics basis.
Want to know more about the CAC Payback Period? Then keep reading to get an in-depth understanding of how it can help your business and how you can benchmark your SaaS CAC Payback Period.
What is the CAC Payback Period?
CAC Payback Period is a measure of how many months it takes a company to generate enough revenue to break even on the cost of acquiring a customer, and is used by SaaS companies to work out how much cash a company needs to grow.
Usually in B2B SaaS, companies that sell to SMEs have less than 12 CAC Months, and companies that sell to enterprise customers have greater than 12 CAC Months.
How to calculate CAC Payback Period?
There are two methods with different SaaS formulas for calculating CAC Payback Period - the Topline Revenue method and the Gross Revenue basis.
The Topline Revenue method for calculating the CAC Payback Period is
The Topline Revenue method is used by companies focused on growing revenue and are not currently concerned with margins. This tends to be earlier stage companies that have ARR of less than $2 million.
Another way to calculate the CAC Payback Period is by computing the break-even on a Gross Revenue Basis.
The Gross Revenue Basis method tends to be used by later stages of growth that have ARR of more than $2 million.
For example, if a company has a CAC of $200 and an ARPU of $20 with an 80% gross margin. Its CAC Payback Period from each of the methods are -
Why CAC Payback Period is important?
The CAC Payback Period is critical because it helps SaaS businesses figure out the amount of time it will take to earn back the expenses incurred when acquiring a new customer.
While the CAC Payback Period is essential, it shouldn’t be viewed in isolation. Whilst lower CAC months are considered preferable, there are many examples of successful SaaS companies with high CAC months, like Xero and Quickbooks.
The combination of these factors means that the business requires a substantial amount of cash to grow its revenue in the short term but can consistently deliver positive unit economics in the long term.
Benchmark your CAC Payback Period
Use our new free tool to help you see how your CAC Payback Period stacks up against 200 VC-funded private companies in the Bessemer Venture Partners portfolio. The free template helps SaaS organisations benchmark their valuation, LTV, CAC, ARPU, and other metrics. Click here to access the free SaaS metrics valuation benchmarking template.