CAC payback period explained (Customer Acquisition Cost)Link to this section
Acquiring new customers is essential to the growth of any software company. But the acquisition costs incurred are a significant investment, particularly in increasingly competitive channels.
You also need to ensure that these customers stick around long enough for you to turn a profit on them. That’s where the customer acquisition cost (CAC) payback period comes in.
What is the CAC payback period?Link to this section
The CAC payback period is refers to how long it will take to recoup the costs linked with acquiring a new customer.
In order for your business to make money on that customer, they need to payoff their acquisition cost before churning. And, depending on your industry, those acquisition costs can be astronomical after accounting for all marketing and advertising costs.
Calculating CAC payback period regularly will help you track the minimum time you need to retain users for to break even.
How to calculate CAC payback?Link to this section
Before calculating the CAC payback period, it’s essential to understand your customer acquisition cost (CAC); how much you’re spending to acquire each additional customer.
CAC = Sales and Marketing Expenses in period / New Customers in period
Once you have that, the rest is relatively simple. You just need to figure out how much each customer is paying you on a monthly basis (either your monthly subscription price, or average revenue per user), and divide your CAC by that figure.
CAC Payback Period (months) = CAC / Monthly ARPU
If a company has an acquisition cost of $200, and each customer comes onto a plan that costs $10/month, then they’ll have a CAC Payback of 20 months.
Why is CAC payback important?Link to this section
The CAC payback period is a helpful financial metric for tracking how long it takes for your business to break even after acquiring new customers. By understanding this metric, you can also assess the cash flow of your business and how quickly you can generate a profit from your users.
It can also offer insights into how cost-effective your customer acquisition strategies are when compared with your per user revenue. A long payback period may signal that the service is priced too low, or you’re overspending on acquisition.
Comparing CAC payback period to LTVLink to this section
SaaS companies don’t just rely on CAC payback to measure their growth. Many startups seek a balanced LTV (lifetime value) to CAC ratio, rather than simply attempting to reduce the CAC payback period. It divides the average lifetime value of a customer by the acquisition cost to calculate your return on investment.
By using a combination of financial metrics, you can gain a more holistic view of your company’s revenue and the value of each user.
Ways to reduce the CAC payback periodLink to this section
Improving payback period for customer acquisition cost (CAC) requires experimentation and understanding of your business and customers. Here are a few practical ways to reduce the CAC payback period:
Breaking it down, you can either look to reduce your acquisition cost, or increase average revenue per user. Some efforts to try:
- Experiment with pricing: the more value you extract from your users, the quicker you can break even on acquisition costs.
- Analyze marketing efforts: try to find ways you can bring in high value customers (high ARPU, high retention) while maintaining or even lowering your acquisition cost. Compare the returns of different marketing channels to figure out which ones are working.
- Optimize your sales funnel: ensure that your sales funnel is running efficiently by identifying and fixing bottlenecks in the conversion process. A better conversion rate will help lower the overall cost of acquiring new customers.
Understanding how to calculate and analyze the CAC payback period can help you gain a clear understanding of how long it takes for your company to get back in the black after acquiring a new user.
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