In SaaS business, you have to spend money to make money. When it comes to acquiring customers, SaaS businesses spend a lot of money to attract potential customers. 

Collectively, the money a business spends on acquiring customers is known as customer acquisition costs (CAC). Typically, it will take time for a business to recoup customer acquisition costs. This is the period that is referred to as CAC payback period. 

WHY IS CAC PAYBACK PERIOD IMPORTANT?

This is a critical metric that SaaS businesses need to keep an eye on to determine the amount of time it will take for sales and marketing expenses to convert into positive cash flow.

WHY DOES CAC PAYBACK PERIOD MATTER?

Ideally, a SaaS business must recover its customer acquisition costs within a year, though some businesses can recover customer acquisition costs in 5 to 7 months. New SaaS businesses may take even more than 12 months to recoup CAC. A short CAC payback period is an indicator of good performance in SaaS business. If it’s taking more than 18 months to recover CAC, a business needs to be careful about the number of customers it acquires because operating unprofitably for such a long period may.

WHAT IS CAC PAYBACK PERIOD?

CAC payback period is the amount of time a business takes to recover the money spent upfront on acquiring a customer, typically expressed in months.

CAC payback period indicates how quickly a business’s investment in customer acquisition reaches a break-even point.

CAC PAYBACK PERIOD FORUMLA

WHAT DOES CAC STAND FOR?

CAC payback period is obtained by dividing the customer acquisition cost by the business’s gross margin. 

CAC payback period (months) – CAC / (ARPA X Gross Margin) where:

ARPA – Average Revenue Per Account  

CAC = Sales and marketing expenses divided by new customers acquired.

BENCHMARKING: THE GOOD AND BAD

This metric provides useful insights into a SaaS business’s capital and acquisition efficiency. Business owners can use this metric to determine how efficiently they are spending money to acquire new customers and how well they can sustain their acquisition strategies in the long term.  A long CAC payback period indicates that a business needs to improve its acquisition efficiency. Understanding this key metric will also help SaaS businesses to cut costs in the marketing funnel if users are churning before recouping the initial investment and the payback is considerably long.

WAYS TO REDUCE YOUR CAC PAYBACK PERIOD

OPTIMIZE CONVERSION RATES

SaaS businesses need to make the process of buying as smooth as possible to reduce bounce back rate. This can be achieved through optimizing the business website as mobile experience, implementing a chatbot, and improving clarity and persuasiveness of a website.

IMPROVE CUSTOMER RETENTION

It’s easier to retain an existing customer than attract a new one. Therefore SaaS businesses can reduce CAC payback period by implementing strategies for customer retention. 

Focusing on CAC payback period puts your focus on attracting new customers and growing revenue from the existing customers.  At FirstOfficer, we provide SaaS businesses with advanced analytic tools for tracking CAC payback period. Our tools are insightful, accurate, and secure.