Software and internet platforms
CAC payback period
How many months of gross profit it takes to earn back the cost of winning a customer.
Facts checked against sources onWhat does CAC payback period mean?
CAC payback is the customer acquisition cost divided by the monthly gross profit the new customer brings in. CAC payback (months) = CAC / (new monthly recurring revenue x gross margin). Example: it costs 12,000 in sales and marketing to win a customer paying 1,000 a month at an 80 percent gross margin, so payback is 12,000 / 800 = 15 months. Shorter is better, because cash spent on growth comes back sooner, and what counts as good depends on the type of customer and how long customers stay. Use gross profit, not revenue: using revenue makes payback look faster than it is.
Where does it come up in case interview prep?
- Unit economics in any businessLesson in How industries work: the toolkit
- Marketing return: CAC, payback, incrementality, and why last-click credit misleadsLesson in Customers and growth: the economics of marketing
- Founders and startup operatorsLesson in The same acumen in other roles
- How software and SaaS companies workLesson in Software and SaaS
- SaaS unit economics: ARR bridge, NRR, CAC payback, and rule of 40Lesson in Software and SaaS
- Cybersecurity economics: breach risk, SaaS and servicesLesson in Cybersecurity
Related terms
- CAC (customer acquisition cost)What it costs, on average, to win one new customer.
- Payback periodHow long until an investment earns back its cost.
- CLV (customer lifetime value)The profit a customer is expected to bring over the whole relationship.
- Annual recurring revenue (ARR)The yearly value of all active subscription contracts at a point in time.
- Gross profit and gross marginRevenue minus the cost of goods sold, as an amount or a percent.
- Net revenue retention (NRR)How much recurring revenue a group of existing customers brings in a year later.
- Rule of 40A software company's growth rate plus its profit margin should add up to at least 40 percent.
- Gross merchandise value (GMV)The total value of goods or services sold through a platform.
Learn it in context
See CAC payback period at work in a lesson from How industries work: the toolkit, with checks as you go.
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