Closing sales and onboarding new customers is an exhilarating experience. It feels like a reward for the hard work you did during the sales process. The new revenue that comes from it doesn’t hurt, either. No matter how long you’ve been in business, the thrill of landing a new deal never goes away.
While it should always feel like an accomplishment when new customers choose to do business with your company, there are other important considerations about the sale. How will you train the customer’s users? Do you have enough staff to provide adequate support? And what is your customer acquisition cost (CAC) payback period?
CAC payback is a key growth metric that every SaaS sales and marketing team should monitor closely. What does CAC payback mean? Why is it important? How do you calculate it? How long does the average CAC payback period last? These are all questions that need answers. You should also think about how you can decrease your payback period, so you can accelerate your profitability and growth.
If you need a better understanding of CAC payback, you’re in the right place. We’re tackling all of these questions in this article, so you can understand why CAC payback is an essential metric for any SaaS business.
What Is Customer Acquisition Cost Payback? (And Why Does This Metric Matter?)
Customer acquisition cost (CAC) payback is the length of time it will take you to recover the cost of acquiring the customer. It’s essentially how long it takes you to reach a break-even point. Businesses usually measure the CAC payback in months.
Think about your customer acquisition plan. It typically requires you to put down an upfront monetary investment to attract and acquire new customers: You spend advertising dollars. You pay your salespeople to prospect, present, negotiate, and close the sale. You spend money acquiring the customer, and this money makes up your customer acquisition cost.
Your company’s growth is directly influenced by the CAC payback period. The more you spend, the longer it will take your company to reach the break-even point for the customer. Since breaking even means getting back to where you began, there’s no revenue growth during that time. A long CAC payback can stunt your company’s growth and hinder its viability. We’ll talk about this in more detail later.
The CAC payback is an important metric for SaaS companies. Managing it well can be the difference between keeping your company vibrant and thriving, or being strapped and stifled.
How To Calculate CAC Payback
Using the CAC payback calculation is essential in understanding its impact on your business. The formula requires three key metrics. Here’s how to calculate each one and ultimately find your CAC payback:
1.Determine your Customer Acquisition Cost (CAC): To determine your CAC, add up all the money you spend on attaining new customers. Then divide that total by the number of customers you acquired. The number you’re left with is the dollar amount of your CAC. The CAC calculation formula looks like this:
Dollars spent obtaining new customers / Total number of customers acquired = Customer Acquisition Cost
2. Determine your Average Revenue Per Account (ARPA). This revenue forecasting method, generally measured on a “by month” or “by year” basis, is simple to calculate. Start with your company’s revenue within a certain time period, and divide that number by the number of accounts your company had during the same period of time. The ending number from this calculation is your APRA. Here is the formula:
Company revenue / Number of accounts = Average Revenue Per Account (by month or year)
3. Determine your Gross Margin Percentage. While 31% of SaaS companies say they rarely offer discounts, if your company does, you need to factor those discounts into your net sales. You’ll need to know your net sales and cost of goods sold (COGS) to calculate your gross margin percentage metric. This formula looks like this:
(Net sales – COGS / Net sales) x 100 = Gross Margin Percentage
Once you calculate these metrics, you can accurately determine your CAC payback. Here is the CAC payback period formula:
(CAC / ARPA) x Gross Margin Percentage = CAC Payback
Keep in mind that you can also calculate CAC payback by replacing ARPA with the monthly recurring revenue (MRR) metric in the CAC ratio:
(CAC / MRR) x Gross Margin Percentage = CAC Payback
Now that you’ve determined your company’s CAC payback, you need to know how to use it to manage your business. This starts with understanding the average CAC payback period.
What Is the Average CAC Payback Period?
Revenue operations managers know there isn’t a hard-and-fast “perfect” CAC payback period that every SaaS company should aim for. Factors like where you are in your business growth and the industry you’re in can drive how long your payback period should be.
Broadly speaking, the average CAC payback period is between five and 12 months. David Skok, a serial entrepreneur turned venture capitalist, recommends having a goal of recovering your customer acquisition costs in under 12 months. Attaining this metric in your designated time frame is essential for maintaining a solid business and protecting your growth goals.
Setting CAC Payback Benchmarks for Your SaaS Business
When you’re deciding on the CAC payback period that is best for your business, you need to analyze your SaaS company. Different types of businesses have different CAC payback periods. Here are some examples:
For a business to succeed, landing customers as soon as possible is vital. That’s why a recent startup may have a longer CAC payback period than a more seasoned company. Startups need to spend more to acquire new customers because they don’t have a well-known name or recognizable branding behind them. As a result, a startup’s customer acquisition cost may be higher than an established, well-known company.
It’s also smart to consider the lifetime value (LTV) of a customer. Even so, startups should strive to keep their CAC payback period under 12 months. This helps them free up cash flow and hit their growth goals.
Early-Stage SaaS Companies
Having at least a few years of experience gives companies a greater edge in terms of knowing the best ways to acquire customers. This provides a better understanding of which channels are best to invest money into.
As early-stage companies grow and adapt, their customer acquisition cost typically decreases. How much it decreases depends partly on the customer churn ratio. Every business deals with churn, which ideally shouldn’t exceed 7% annually.
If your churn rate is high, you need to reduce your CAC payback period as much as possible. After all, you don’t want the customer to cancel their services with you before you break even on the costs of acquiring them — that means you lost money on them. If your churn rate is stable, a lower CAC payback period is still beneficial, but it’s not the dire emergency it is in the first scenario.
It’s easy to learn what works by doing it a few times. Large, well-established companies should be able to keep their CAC payback period under control to maintain their profitability. Knowing what works to acquire customers and how to keep customers is essential. Attaining a high customer LTV is another way that seasoned companies can maneuver the CAC payback period metric in their favor.
How to Decrease Your CAC Payback Period
There are several ways companies can decrease their CAC payback period and reach the break-even point faster. Doing this will improve your B2B SaaS company‘s customer success efforts, increase its profitability, and expand its growth opportunities. Here are a few ways you can accomplish this:
Embrace Product-Led Growth (PLG)
SaaS companies that focus on PLG can lower their CAC payback period. Instead of spending sales and marketing money acquiring customers, the product drives the buying journey and brings on new customers. This method can decrease the CAC, which decreases the CAC payback period. Here are five companies that are doing PLG well.
Re-Evaluate Your Marketing Strategy
Forging better, more efficient processes and getting the most out of your money is a good thing. When companies want to decrease their CAC payback period, they should benchmark their marketing and sales initiatives. Are there areas that don’t perform well? If so, stop spending that money, or reallocate some of it to a more productive part of your strategy. A successful marketing and sales strategy creates greater acquisition efficiency for your SaaS company.
Focus on Profitable Acquisition Channels
It doesn’t make sense to spend money on trade shows when most of your leads come from LinkedIn ads. Allocate your marketing and sales dollars where you see the best performance and greatest return on investment. Cost-effectively building up your conversion rates will directly impact your CAC payback period.
Fortify Your Customer Retention Strategy
Once you spend the time and money acquiring customers, don’t lose them! Decreasing your customer churn ratio and increasing the customer lifetime value both help bring down your CAC payback period. Providing a strong customer support department, easy-to-understand pricing, and a robust communication channel will increase customer retention.
Explore New Pricing Models
Your pricing model is an important tool in reducing your CAC payback period. If you haven’t revisited your structure in a while, then revamping your pricing strategy may be the key.
Think about implementing revenue-boosting initiatives like adding annual subscriptions, fees, and other recurring pricing strategies to your business model. These directly increase the amount of money coming in, which helps you hit your break-even point quicker. Charging customers more upfront can also reduce your payback period.
Reduce Your CAC Payback Period To Accelerate Growth
Understanding what CAC payback period is and how to calculate it can provide your SaaS business with valuable insights surrounding your growth capabilities. When you know how to use your customer acquisition cost, APRA, and gross margin percentage (or MRR) to calculate your CAC payback, you can get a solid idea of where your business stands, and how to set attainable CAC payback goals for your business.
Even if your CAC payback period is longer than the average, take heart. There are several ways to decrease it, like generating more income, decreasing your spending, retaining your customers, and changing your pricing strategy. One, or a combination of these, can get your CAC payback in line with what it should be.
Scale Your Business With Sales Assembly
When you have a firm understanding of how to complete your SaaS company‘s financial forecasting, you’ll have a better grasp of what the model’s output will tell you — which makes it easier for you to make smart decisions about scaling your business. Sales Assembly works with expanding businesses to help them scale successfully.
If you’re anticipating growth, contact us today to schedule a consultation with one of our experienced professionals.