CAC payback: What it is + how to calculate it (with formula)

In the competitive SaaS industry, where the average annual churn rate hovers around 5.2%, businesses need to be vigilant about their customer acquisition costs and payback periods. 

Understanding CAC (customer acquisition costs) payback is crucial for achieving sustainable growth and profitability.

What is CAC payback?

CAC payback (often written as CAC payback period) is the time it takes to recover your customer acquisition cost from gross profit. 

In SaaS terms, that means the number of months for a new customer’s gross-margin-adjusted revenue to cover what you spent on sales and marketing to win them. You will also see people call this the SaaS payback period. It means the same thing.

Why it matters: Shorter CAC payback means stronger cash flow and faster reinvestment. A longer payback ties up capital and raises risk if retention is weak. 

Note: If you’re mapping all your core metrics for leadership, read our SaaS metrics guide next.

Why is CAC payback important in the SaaS industry?

CAC payback is key as it gives SaaS companies a clear view of their financial efficiency and growth potential. A shorter payback period means that the company is generating revenue based on its sales and marketing investments faster, which is generally a good sign of financial health.

Think of it this way: Acquiring a customer is an investment. Just like any investment, you want to know when you'll start seeing a return. CAC payback tells you exactly that.

Here's a breakdown of why CAC payback matters:

• Cash flow management: Knowing how long it takes to break even helps businesses manage their cash flow. It also helps them verify that they have enough resources to sustain growth.
• Investment decisions: CAC payback informs investors and board members about the company's ability to generate ROI.
• Marketing and sales strategy: By understanding their CAC payback period, companies can optimize their marketing and sales efforts to gain additional customers more efficiently.

CAC payback formula

Payback period formula:

CAC payback (months) = Sales and marketing expense in period ÷ (New MRR from new customers × Gross margin)

Key inputs you need:

• Sales and marketing expense for the period you’re measuring.
• New MRR from new customers in that same period (exclude expansion MRR and churn).
• Gross margin for those customers, not total revenue.

Important: Don’t use net new MRR for CAC payback. Net new mixes expansion and churn from existing customers, which distorts acquisition efficiency for new customer acquisition. Stick to MRR from new customers when the numerator is customer acquisition cost.

How to calculate CAC payback in SaaS companies: 3 steps

As you know by now, calculating your CAC payback is a crucial step toward understanding your SaaS business's financial health. It's a straightforward process, but let's break it down step-by-step to ensure clarity:

1. Collect data for the same period. Gather sales and marketing spend, new customers’ MRR, and your SaaS gross margin.
2. Align timing. If your average sales cycle is two months, shift S&M spend back by two months so the spend lines up with the customers it created.
3. Apply the formula. Divide S&M expense by new MRR × gross margin to get months to recover CAC.

Example

• Sales and marketing expense: $50,000 in the quarter
• New MRR from new customers: $20,000
• Gross margin: 80%

CAC payback = 50,000 ÷ (20,000 × 0.80) = 3.125 months

Payback period calculator

You can build this in any spreadsheet with the formula above. Create inputs for S&M, new MRR, and gross margin. Return months as a number and use conditional formatting to flag results above your target.

Note: If you’re modeling lifetime economics alongside payback, read our CLTV formula guide.

What is a good CAC payback period? 

The answer, as with many things in business, is "it depends." However, we'll provide some clear guidelines to help you assess your own situation. Let’s start by looking at some general benchmarks.

General benchmarks

• 12 months or less: This is a common benchmark for SaaS startups. If your CAC payback is within this range, you're generally on the right track. It suggests that your customer acquisition efforts are efficient, and you're creating revenue at a healthy pace.  
• 5 to 7 months: This is a benchmark for high-performing SaaS companies. Achieving a CAC payback in this range indicates superior efficiency in getting and monetizing customers.

Factors influencing benchmarks

These benchmarks provide a good starting point, but it's important to consider other factors. These can also tell you if the CAC payback period for your business is good or not:

• Customer lifetime value (LTV): If your customers have a high LTV, then you can afford a longer CAC payback period. A high LTV means they stay with you for a long time and generate notable revenue. 
• Funding stage: Early-stage startups often have shorter payback periods, driven by limited resources and the need to show rapid growth to secure funding from investors.
• Industry and target market: Different industries and customer segments have different expectations and norms for CAC payback.  
• Pricing model: Annual subscriptions or upfront payments can lead to faster payback periods compared to a monthly billing cycle.  

Warning signs

Here are some red flags that might indicate a worrying CAC payback period:

• Consistently exceeding 12 months: This could signal inefficiencies in your sales and marketing processes. It might also suggest that your pricing is too low.
• Increasing CAC payback over time: This trend could indicate that your average CAC payback period is rising faster than your revenue growth.
• Payback period longer than customer lifespan: This is a critical issue. It means you're losing money on each customer.

Key takeaways

• Context is key: Don't view CAC payback in isolation. Always consider it in conjunction with other relevant metrics like LTV, churn rate, and your overall business goals.
• Continuous improvement: Regularly monitor your CAC payback. You should strive to improve it over time. This process could involve optimizing your marketing campaigns. It can also mean refining your sales process or tweaking your pricing strategy.

Note: For context on typical performance by stage and segment, see our SaaS benchmarks.

What can you do to reduce CAC payback?

By now, you know that reducing your CAC payback period is a key goal for any SaaS business. Here are some proven strategies to help you achieve that goal.

Strategy 1: Fine-tune your customer acquisition channels

Take a close look at your various customer acquisition channels and evaluate their effectiveness. Are you spending a notable portion of your budget on channels that generate low-quality leads? Or are you getting leads that result in high acquisition costs? 

Identify the channels that consistently deliver the best ROI. Consider doubling down on those. For instance, let’s say LinkedIn Sponsored Posts consistently bring in high-quality leads. If there’s an important difference compared to Google Ads, then shift your focus and resources.

Strategy 2: Prioritize customer retention

Prioritize keeping your existing customers happy and engaged. Customer retention plays a crucial role in reducing your CAC payback. When customers stay with you longer, they generate more revenue over time. As a consequence, they help you recover your acquisition costs faster.

Implement strategies to improve customer satisfaction, such as regular quarterly business reviews and white-glove customer support.

Strategy 3: Encourage longer subscription plans

Consider offering incentives for customers to choose annual or multi-year subscriptions. By securing larger upfront payments, you can greatly reduce your CAC payback period. This strategy not only accelerates your revenue recovery but also improves LTV.

Strategy 4: Optimize pricing for profitability

Review your pricing strategy to confirm it aligns with the value you provide. Ensure also that it allows for healthy profit margins. 

Sometimes, a simple price adjustment can significantly impact your CAC payback period. Experiment with different pricing models, such as tiered pricing or usage-based pricing. The goal is for you to find the right balance between customer acquisition costs and revenue generation.

Strategy 5: Leverage the power of upselling and cross-selling

Identify opportunities to upsell or cross-sell to your existing customer base. It's often easier and more cost-effective to sell additional products or services to existing customers who already know and trust your brand. 

By increasing the average revenue per customer or average contract value, you can accelerate your CAC payback and boost overall profitability.

Strategy 6: Embrace product-led growth

Consider incorporating elements of product-led growth into your strategy. Product-led growth focuses on using the product itself as the primary driver of customer acquisition, conversion, and expansion. 

By creating a user-friendly and valuable product experience as a GTM motion through levers such as free trials, you can reduce the reliance on expensive sales and marketing efforts. Ultimately, using this approach can lead to a shorter CAC payback period.

Strategy 7: Continuously monitor and analyze

Regularly track your CAC payback and analyze the factors that influence it. This analysis includes monitoring your CAC, LTV, churn rate, and the performance of your various acquisition channels. 

Remember: By staying vigilant and making data-driven adjustments, you can continuously improve your CAC payback. This way, you’re driving sustainable growth for your SaaS business.

Note: If you are tuning top-of-funnel efficiency, learn how the SaaS Magic Number complements CAC payback.

Consider these best practices for more accurate results

Calculating your CAC payback accurately is crucial for making informed business decisions. We’ll now share some best practices to guarantee you're getting the most precise and insightful results. Let’s share five key best practices to help you hit the bullseye every time:

Best practice 1: Include all customer acquisition costs

Some firms mistakenly include only direct marketing expenses when calculating CAC. Think ad spend, for example. They might overlook indirect costs like salaries, software, and overhead. This issue can lead to underestimating the true cost of acquiring a customer.

Solution: Check that your CAC calculation includes a complete view of all costs associated with customer acquisition. This includes:

• Salaries and commissions for sales and marketing teams.
• Marketing software and tools (e.g., CRM, marketing automation).
• Agency fees and outsourced services.
• Overhead allocations tied to customer acquisition efforts. Think rent for office space used by the marketing team, for instance.

Example 

Imagine a SaaS company that spends $20,000 on online advertising and acquires 100 customers. If they only consider the ad spend, their CAC would appear to be $200 per customer. 

However, if they include sales salaries ($30,000) and marketing software costs ($5,000), their true CAC becomes $550 per customer ($55,000 / 100 customers). This new figure provides a more accurate picture of their acquisition costs.

Best practice 2: Factor in gross margin

Many companies calculate CAC payback based on total revenue. They end up ignoring the cost of goods sold (COGS). This omission can lead to an overestimation of profitability. Worse yet, it can yield inaccurate results when calculating your CAC payback period.

Solution: Calculate CAC payback based on gross profit, not total revenue. You should be factoring in the costs of delivering your service, such as:

• Hosting fees
• Customer support expenses
• Onboarding costs

Note: For companies that aren't yet profitable, this calculation will highlight the importance of reaching a point where gross profit can cover customer acquisition costs. It emphasizes the need to either increase revenue or decrease COGS to achieve a sustainable CAC payback.

Example 

A company with a gross margin of 70% generates $10,000 in monthly recurring revenue (MRR) from new customers. If they calculate CAC payback based on total revenue, it might appear shorter than it would have had they factored in COGS. 

However, factoring in the 30% COGS, their actual gross profit is $7,000. Factoring in this element leads to a more realistic CAC payback calculation.

Best practice 3: Don't forget about churn

A typical oversight is thinking that all new users will stay long enough to recoup their CAC. High churn rates can seriously extend payback periods, making your initial calculations misleading.

Solution: Factor in customer retention and churn when assessing CAC payback. Use metrics like average customer lifetime value (LTV) to understand the sustainability of your payback period.

Example 

Say a company has a CAC payback of 6 months based on initial MRR. However, if their average customer churns after 4 months, they won't fully recover their acquisition costs. 

That’s why, by considering churn, they can adjust their strategy. The company can shift focus and concentrate on retention efforts to achieve a more sustainable CAC payback.

Best practice 4: Account for promotional offers

Pricing discounts, trial offers, and freemium models can delay revenue collection. However, these are often not considered in CAC payback calculations. This approach may lead to overly optimistic estimates. These may offer a skewed view of what’s really happening. 

Solution: Adjust your revenue estimates to account for reduced payments during promotional periods or free trial durations. Going with this approach provides a more realistic view of your payback timeline.

Example 

Imagine a SaaS company offering a 50% discount for the first 3 months. They need to factor that discount into their revenue projections when calculating CAC payback. This adjustment will show a longer payback period. It will reflect the actual time it takes to recover acquisition costs.

Best practice 5: Keep onboarding out of CAC (treat it in COGS)

Onboarding and implementation happen after the deal closes. They belong in COGS and affect gross margin, not CAC. Including them in CAC overstates acquisition costs and misaligns with standard SaaS accounting.

Solution: Record onboarding costs in COGS and reflect them through the gross-margin adjustment in the CAC payback denominator. Keep CAC limited to sales and marketing costs to win the customer.

Example 

If it costs $1,000 to acquire a customer and $500 to onboard them, CAC stays $1,000. The $500 reduces gross margin, which lengthens the payback period appropriately without inflating CAC.

Remember: By following these best practices, you can ensure that your CAC payback calculations are right on the money. With clear and accurate data, you can make smarter decisions to optimize your SaaS business's growth and profitability.

Note: If you report efficiency to the board, pair payback with the Rule of 40 for a complete picture of growth and profitability.

Orb can simplify calculations for your SaaS company

We've explained what CAC payback means and why it's so important for your SaaS business. However, accurately calculating this metric can be a pain. After all, it often involves juggling various data sources and complex spreadsheets. 

That's where Orb helps.

Orb is a done-for-you billing platform. It can simplify your CAC payback calculations and empower you to make better decisions about your growth strategy. Here's how Orb can help:

• With Orb RevGraph, usage data is decoupled from pricing logic, so invoices remain accurate and up to date even as you evolve your pricing.
• Run Orb Simulations on historical data to preview revenue and usage outcomes before launch. Orb enables forecasting so that finance and product teams make more informed decisions.
• Orb reduces billing errors by turning raw usage data into fully auditable invoices. By performing calculations on raw data, Orb ensures that your pricing updates are accurately reflected in customer bills without friction or guesswork.
• Direct integrations keep usage and revenue data synced across your CRM, data warehouse, and finance stack.
• Launch new pricing plans quickly with your customized billable metrics. You define metrics in SQL or a visual editor without engineering help. Orb's API ingests usage events and separates usage from pricing, enabling real-time changes without engineering bottlenecks.

Ready to unlock the full potential of your recurring revenue strategy? Consult our flexible pricing options to find a plan that aligns with your needs.