CAC payback: What it is and how to calculate it in SaaS

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.

Our article provides a guide to CAC payback. We'll break down the concept and share actionable strategies to reduce your payback period and boost profitability.

You'll also learn:

• Why CAC payback is critical for SaaS businesses
• How to calculate CAC payback in three simple steps
• Benchmarks for a good CAC payback period
• Strategies to reduce your CAC payback
• Best practices for accurate CAC payback calculations

Let’s get started by explaining what CAC payback is and why it’s important in SaaS.

What is CAC payback?

CAC payback is a metric that measures the time it takes to recoup the initial investment made in acquiring a new customer. It stands for customer acquisition cost. Think of it like a financial break-even point, showing how long it takes for the revenue from a customer to offset the cost of bringing them on board.

Why is CAC payback important in SaaS?

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.
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• Investment decisions: CAC payback informs investors and board members about the company's ability to generate ROI.
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• Marketing and sales strategy: By understanding their CAC payback period, companies can optimize their marketing and sales efforts to gain additional customers more efficiently.

How to calculate CAC payback in 3 simple 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.

Step 1: Gather your data

To calculate CAC payback, you'll need three key pieces of information:

• Customer acquisition cost (CAC): This is the total cost associated with acquiring a new customer. It includes all sales and marketing expenses, such as advertising, salaries, content creation, and events.  
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• Net new MRR: This is the monthly recurring revenue generated from new customers in a given period. It's essential to use net new MRR to account for any churn or expansion revenue.  
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• Gross margin: This represents the percentage of revenue remaining after deducting the cost of goods sold (COGS). In SaaS, COGS typically includes hosting costs and customer onboarding expenses.  

Step 2: Follow the CAC payback period formula

Once you have your data, you can plug it into the following formula:

CAC payback = Sales & marketing expenses in period / (net new MRR acquired in period * gross margin)

Step 3: Check this practical example and apply it to your case

Let's imagine a SaaS company called "CloudSoar" that wants to calculate its CAC payback for the last quarter. Here's their data:

• Sales & marketing expenses in a given period: $50,000
• Net new MRR: $20,000
• Gross margin: 80%

Now, let's plug these figures into the CAC payback period formula:

CAC payback = $50,000 / ($20,000 * 0.80) = $50,000 / $16,000 = 3.125 quarters

In this example, it takes CloudBoost approximately 3.125 quarters to recover the cost of acquiring new customers.

Important considerations:

• Time period: The time period you use (monthly, quarterly, annually) should align with your business goals and reporting needs.
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• Accuracy: Confirm that your data is accurate and up-to-date for a reliable CAC payback calculation.

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.  
• 5-7 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. 
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• 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.
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• Industry and target market: Different industries and customer segments have different expectations and norms for CAC payback.  
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• 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.
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• Increasing CAC payback over time: This trend could indicate that your CAC are rising faster than your revenue growth.
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• 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.
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• 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.

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, LTW, 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.

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 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: Include onboarding costs

The cost of onboarding new customers is often overlooked in CAC calculations. This oversight is especially problematic in SaaS models that need lots of customer training and support. 

Solution: Include onboarding and implementation costs as part of your CAC calculation. Doing so provides a more accurate picture of the total investment required to acquire and keep a customer.

Example 

Think of a SaaS company that spends $1,000 to acquire a customer and an extra $500 to onboard them. They should include the $500 onboarding cost in their CAC calculation. Adding those $500 results in a more accurate CAC of $1,500 and a more realistic payback period.

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.

Orb can streamline 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:

• Accurate revenue tracking: Orb helps you keep track of your revenue sources. Think product SKUs, recurring subscriptions, one-time purchases, and usage-based fees. This granular data ensures that your CAC payback calculations are based on precise revenue figures.
  
  
• Automated reporting: Orb provides automated financial reports, including key metrics. By leveraging Orb's API and data warehouse integrations, you can connect your expense tracking system and gain a complete view of your CAC and payback periods.
  
  
• Integrations galore: Orb integrates with popular tools like Salesforce, HubSpot, and your data warehouse. All your customer and financial data is centralized and readily available for analysis.
  
  
• Flexible pricing models: Orb supports a wide range of pricing models. Everything from simple subscriptions to complex usage-based pricing is covered. This flexibility lets you test different pricing strategies and analyze their impact on your CAC payback period.
  
  

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