The Customer Acquisition Cost (CAC) payback period refers to the number of months it takes for a company to recover the cost of acquiring a new customer (break-even point), based on the average customer lifetime value.
This metric is often used to determine whether a marketing team’s efforts were successful, as it measures the return on investment (ROI) based on the average monthly contribution per customer.
Why is the CAC payback period important?
Understanding acquisition efficiency through CAC payback calculation is critical for comprehending a company’s cash flow.
It helps business leaders to:
Gain awareness of how much money businesses are losing on unproductive methods for attracting new customers.
Ascertain if the present acquisition model is effective or whether adjustments are necessary before revenue is lost.
Be able to forecast future company growth and determine the appropriate amount to spend per client.
However, the CAC payback metric must be matched with other key metrics such as customer lifetime value (LTV) or the LTV:CAC ratio.
CAC payback benchmark for startups
In general, the lower the CAC payback, the better. The recommended average CAC payback period for SaaS startups spans between 5 and 15 months.
Yet, early-stage companies may have a longer CAC payback than well-established organizations since this measure fluctuates as they grow.
Larger enterprises, on the other hand, might also have longer CAC payback periods since they have more access to capital and resources, allowing them to cover more acquisition approaches over a specific time period.
4 actions to have shorter payback periods
Businesses must reduce the cost of acquisition while keeping ROI in mind to achieve their growth targets and reach a shorter payback period. Here are four actions managers may take to do this:
Promote annual subscriptions such that the pricing model in place supports a shorter payback period.
Use data analytics in real-time to predict probable customer churn and work on retention rates so that current customers stay long enough to recover CAC.
Evaluate the efficiency of the marketing channels and prioritize the least expensive ones.
Offer strategic promotions to attract potential customers while maintaining high levels of customer satisfaction.
