CAC Payback Period is one of the most referenced, yet miscalculated, metrics in the tech world. Today we’ll cover the following:
I. The Art - What it is
II. The Science - Two preferred ways to calculate it
III. The Components - The data inputs
IV. A template for you to use in your own calcs
V. What does “good” look like? - Benchmarking real companies
VI. Can CAC Payback be too low? - With advice from Alex Clayton of Meritech
VII. Anything else to watch out for? - Red flags to beware of
The Art
Customer Acquisition Cost is what you spend in sales and marketing costs to go out and get a net new customer.
CAC Payback Period is a derivative of Customer Acquisition Cost, and spits out the number of months it takes to breakeven on that new customer.
CAC Payback Period also incorporates the customer support and maintenance costs associated with getting the customer to stick around (COGS, or Cost of Revenue).
CAC Payback Period is important because it shows how efficient your GTM machine is. Investors care about it because you can’t trade a buck for eighty-five cents forever, and this indicates if you’ve built a model that can get to sustainable unit economics.
The Science
Below are the two most common ways to calculate CAC Payback.
Neither is inherently better - I’m providing options because you won’t always have all the components you need, and might need to be flexible.
Whether you use COGS as a dollar figure, or as a % of revenue, either way, you need to make sure you gross margin adjust your CAC Payback Period.
The Components
Sales and Marketing Expenses: S&M should be lagged according to the average sales cycle of the sales engine you’re measuring. The goal is to align the dollars you spent in the past to generate the sales you are finally seeing today. This is especially important if you are hiring GTM people really quickly. You don’t want the costs of new hires who haven’t sold anything yet (deadbeats!) to show up in the CAC Payback for today’s additions. Examples of lagging by segment:
Enterprise sales cycle of 180 days = 2 quarter S&M lag
Mid-Market sales cycle of 90 days = 1 quarter S&M lag
SMB sales cycle of 30 days = 0 quarter S&M lag
Cost of Goods Sold (COGS): This includes hosting costs, customer support, and customer success. It’s basically the ongoing costs you incur to keep your install base around. It’s taken from the period you are measuring, with no lag.
Not to beat a dead horse - but you DO NOT lag your COGS (or gross margin)
New Revenue Additions: These are the in-period additions to your topline, preferably measured in ARR.
It is NOT your
totalRevenue, MRR or ARR - just net new, and expansion if you have a land and expand or usage based model.Ideally it is not your
GAAP revenue, which is an accounting based measurement of topline (but can be used in a pinch… more on that below).
Generally, all of these figures are best measured on an aggregated trailing twelve month basis to smooth for seasonality. Most companies add more ARR in their fourth quarter than the rest of the year. This means your S&M will technically go back 5 quarters (or 15 months) if you are lagging by one quarter. Otherwise, looking at it monthly can result in a graph that looks like a heart EKG.
A template for calculating CAC Payback Period
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