Acquiring a new customer comes at a cost, and it’s crucial to understand if the cost is worth it.
And here’s where CAC payback comes in.
But what is CAC payback?
Don’t worry; you won’t be in the dark for much longer.
In this article, we’ll shed light on what CAC payback is, why it is essential, how to calculate it, and how to reduce the CAC payback period. We’ll also explore crucial market benchmarks to look out for and a few FAQs.
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This Article Contains:
- What is CAC Payback?
- Why is CAC Payback Important?
- How to Calculate CAC Payback
- Measure Your CAC Payback Period with SaaS Benchmarks + Practical Applications
- How to Reduce Your CAC Payback Period
- What Are Other Related Metrics to Consider?
- 2 FAQs about CAC Payback
- Safeguard Your Revenue Growth By Tracking CAC Payback
Let’s dive right in!
What is CAC Payback?
Keeping up with all these metrics can get pretty looney. But we’re right here with you!
The customer acquisition cost (CAC) payback measures the time it takes for a business to earn back the money spent on getting a customer.
The shorter the payback period, the better.
If your business is spending more to acquire a customer than the customer is generating in revenue, it can have severe implications for the profitability and sustainability of the business.
What Type of Company Measures CAC Payback?
The type of company that measures CAC payback typically operates in a subscription-based or recurring revenue business model.
Companies in industries such as software as a service (SaaS), e-commerce, telecommunications, or any other business with a subscription or recurring revenue model often track CAC payback as a key performance indicator (KPI).
By understanding the time it takes to recover acquisition costs, these companies can assess their customer acquisition strategies, evaluate the efficiency of their marketing and sales efforts, and make informed decisions about resource allocation.
Now that we know what CAC payback is, let’s explore why your SaaS business needs to track it.
Why is CAC Payback Important?
Tracking CAC payback is vital for any SaaS company seeking to grow sustainably while avoiding financial strain.
Here’s a closer look:
1. Assess Customer Acquisition Strategies
By analyzing the CAC payback period, SaaS companies can evaluate the effectiveness of their customer acquisition strategies and make data-driven decisions to improve their marketing efforts and customer service.
If a SaaS business experiences a prolonged CAC payback period, it may indicate a need to adjust its approach to enhance CAC efficiency and drive long-term growth.
2. Determine Which Marketing Channels or Campaigns Are Effective
By tracking and optimizing the CAC payback period, a business can quickly determine which marketing channel or campaign generates the most customers profitably.
This way, companies can dedicate more of their marketing spend to those strategies and maximize their gross profit.
3. Evaluate Scalability
A prolonged CAC payback period can limit a business’s ability to scale and grow.
Lengthy payback periods mean the business may have limited financial resources to invest in new customer acquisition campaigns, hindering its growth potential.
As you can tell, the CAC metric is worth tracking, but how do you calculate the CAC payback?
How to Measure CAC Payback
Figuring out the CAC payback calculation can be tricky as there are several different ways to do it.
One minor change to the equation can dramatically change your calculation’s outcome and obscure the reality of your sales efficiency.
Here’s the CAC payback period formula in full:
CAC Payback Period = Sales & Marketing Spend / (New MRR * Gross Margin)
Here’s a practical example:
A SaaS company spends $60,000 on sales and marketing spend to acquire 10 new enterprise customers in a given period. The new customers generate $10,000 in monthly recurring revenue (MRR).
Furthermore, the company’s revenue is $200,000, and the cost of goods sold (COGS) is $60,000 monthly.
Firstly, let’s calculate the gross margin:
Gross Margin = (Revenue – Cost of goods sold) / Revenue x 100
Gross Margin = ($200,000 – $60,000) / $200,000 x 100 = 70%
Assuming the gross margin percentage is 70%, the CAC calculation would be:
CAC Payback Period = $60,000 / ($10,000 * 70%) = 18 months.
After calculating the CAC payback, you can gauge whether it takes more time to recover the acquisition costs and adjust your strategies accordingly.
In doing so, you can assess the performance of marketing campaigns, sales initiatives, referral programs, or other tactics to determine which strategies drive efficient acquisition and warrant further investment.
How Often Should You Measure CAC Payback?
The frequency of measuring CAC payback can vary depending on the company’s business model, industry, and specific needs. However, measuring CAC payback monthly, quarterly, and annually is generally recommended.
Monthly tracking allows for the timely identification of any issues or inefficiencies in the acquisition process.
Measuring CAC payback quarterly provides a broader perspective and allows for evaluating trends and patterns over a more extended period.
Annual measurement of CAC a more comprehensive view of performance over a full year and allows for strategic planning and adjustments for the upcoming year.
Measuring at these frequencies lets you stay informed about the effectiveness of customer acquisition efforts and make timely adjustments as needed.
But, do you know how your customer acquisition cost measures up to the competition?
Measure Your CAC Payback Period with SaaS Benchmarks + Practical Applications
A shorter payback period is ideal for a successful SaaS business.
Experts recommend a 12-month CAC payback period, which may vary based on your go-to-market strategy and customer demographics.
Acceptable Ranges for CAC Payback
According to OV Blog’s 2021 Financial & Operating Benchmarks Report:
- To be considered ‘best in class’ for seed funding, your payback period should be 15 months or less.
- But the acceptable period varies depending on your business’s funding series. It can be as high as 28 months for Series C funding.
The CAC payback period benchmark may be slightly higher for larger, better-funded SaaS companies. The access to additional funds means they don’t need to worry about marketing expense and profit immediately.
But it’s important to note that as a SaaS company scales and faces market saturation and competition, its CAC efficiency often decreases. This is due to the need to invest more in customer acquisition strategies, which extends the CAC payback period.
In addition, scaling processes, such as hiring new sales and marketing staff, can also cause changes in your CAC payback period as they increase a company’s costs and expenses.
How Can You Use This?
When a company’s CAC payback is out of the acceptable range, it can negatively affect its financial health and long-term sustainability. It’s essential to take some steps to rectify the situation.
You may need to assess marketing and sales strategies to identify any areas for improvement. You can focus on enhancing the customer experience, providing excellent support, and continuously delivering value to your customers.
You may also want to explore financing alternatives to mitigate the impact of a long payback period. This exploration could involve seeking external financing, negotiating better terms with suppliers, or considering partnerships or joint ventures.
Falling behind your competitors? Let’s explore how to attain a reasonable CAC payback period.
How to Reduce Your CAC Payback Period
Like Olympic sprinting, the aim should be to decrease your record time.
A good CAC payback period is vital for businesses that want to improve their financial efficiency and cash flow. Here are some ways to reduce your CAC payback time:
1. Experiment with Pricing Models
By offering different pricing options, companies can reduce their CAC and shorten their payback period by appealing to a broader range of customers, increasing the product’s perceived value, and encouraging repeat purchases.
2. Embrace Product-Led Growth
Product-Led Growth (PLG) is a marketing strategy where SaaS companies use their product to attract, convert, and retain customers.
By offering free trials, freemium plans, or low-cost entry plans, a SaaS company can let potential customers experience the value of their product before making a purchase decision.
This adjustment ensures that companies rely less on sales and marketing as the product is the primary marketing channel.
3. Implement Innovative Marketing Strategies
Marketing methods such as Facebook Ads and billboards can be expensive and may not yield the desired results.
SaaS companies can implement unique marketing methods, such as running targeted email campaigns and referral marketing, to reduce payback time.
What is referral marketing?
Referral marketing is a valuable strategy to help businesses reduce their CAC payback period by encouraging existing customers to refer new ones.
4. Expand to Higher-Value Market Segments
SaaS companies can conduct market research, identify higher-value segments with higher demand for their product, and tailor their marketing and sale efforts accordingly.
These segments may have a higher willingness to pay, and higher customer retention rates, leading to enhanced customer lifetime value (CLTV) and faster payback periods.
5. Upsell and Cross-sell to Your Existing Customer Base
Upselling and cross-selling to existing customers is a cost-effective way to increase revenue and reduce your CAC payback period.
There are no additional acquisition costs involved when upselling or cross-selling existing customers, which is pivotal to CAC efficiency.
SaaS companies can analyze customer data and product analytics to identify opportunities for upselling or cross-selling. This strategy can include offering premium features, add-ons, or upgrades to existing customers based on their usage patterns and needs.
6. Reduce Customer Churn
When customer churn is high, a business loses many customers over a certain period, reducing its cash flow and extending the CAC payback period.
How can you reduce customer churn?
You can reduce customer churn by sending customer satisfaction surveys and gathering feedback. Then, use this data to reach unhappy customers and make product improvements.
7. Embrace Customer Success
A dedicated customer success team can help reduce the CAC payback period by improving customer satisfaction, driving adoption, and increasing customer retention.
Now that we know how to reduce the CAC payback time, let’s discuss a few relevant metrics you should also keep in mind.
Related Metrics to Consider with CAC Payback
To get a clearer picture of your company’s health and gross profit, track the following additional metrics:
- Cost Per Acquisition (CPA): Refers to the average cost incurred by a SaaS company to get a single customer.
CPA directly impacts the customer acquisition cost payback period, as a higher CPA increases the time it takes for a business to recoup costs.
CPA = Ad Spend ÷ Conversions
- LTV: CAC Ratio: Evaluates the effectiveness of a company’s customer acquisition strategy.
The LTV: CAC ratio directly influences CAC payback, with a higher LTV: CAC ratio (typically 3:1) resulting in less time required to recover CAC.
LTV: CAC Ratio = Lifetime Value / Customer Acquisition Cost
- Average Revenue Per Account (ARPA): Measures the average monthly or annual revenue generated per customer account.
The higher the average revenue per account, the less time it takes to recover CAC.
Average Revenue Per Account = Total revenue / Average Subscribers
- Gross Monthly Recurring Revenue (MRR) Churn Rate: Refers to the rate at which a company loses MRR from existing customers due to cancellations, downgrades, or other reasons.
A high gross MRR churn rate can prolong the CAC payback period.
Gross MRR Churn Rate= Total MRR Churn this month / Total MRR at the start of this month
- Annual Recurring Revenue (ARR): Measures the total revenue a company is expected to generate from its subscriptions over 12 months.
A higher annual recurring revenue typically leads to a shorter payback period, as the revenue generated from each customer is higher and can offset the acquisition cost more quickly.
ARR = (Sum of subscription revenue for the year + recurring revenue from add – ons and upgrades)
Tracking MRR alongside these relevant metrics is imperative for revenue growth. But let’s dive deeper and answer some queries about MRR.
2 FAQs About CAC Payback
Here are the answers to common questions about CAC payback:
1. What is the Difference Between CAC Payback and LTV?
The customer acquisition cost payback is the period it takes for a company to recoup the cost of getting a customer. The customer lifetime value is the estimated net profit a business expects to earn from a customer over their relationship with the business.
The main difference is that the CAC metric focuses on the efficiency of a company’s customer acquisition efforts, while the lifetime value metric focuses on long-term customer value.
2. What are Some Common Mistakes when Calculating CAC Payback?
One common mistake is not including all relevant costs associated with customer acquisition in the calculation.
Failing to include expenses like overhead costs, bonus payments, and the cost of sales and marketing tools can generate misleading results.
An incorrect period for calculating CAC payback can also lead to an inaccurate assessment of a company’s financial health and cash flow. For instance, if a monthly CAC calculation is used for a product with an annual subscription model.
Safeguard Your Revenue Growth By Tracking CAC Payback
Understanding your CAC payback time can give you a clearer picture of the effectiveness of your business’s customer acquisition and retention strategies.
Use this guide to ensure that you calculate CAC payback correctly and leverage the tips we’ve covered to boost your monthly revenue.
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