Subscription metrics
CAC payback period calculator
Payback is how long your money is tied up before a customer has paid for themselves. It decides how fast you can grow without running out of cash.
Payback period
5.7 months
- Customer acquisition cost
- $133.33
- Gross profit per customer, monthly
- $23.20
Payback months = CAC ÷ (ARPU × gross margin)
Why payback uses gross margin
A customer paying $29 a month does not give you $29 to recover your acquisition cost with. Hosting, payment fees and support come out first. At 80% gross margin they contribute $23.20 a month towards paying you back.
Dividing acquisition cost by revenue rather than by gross profit understates payback by exactly the margin you forgot, which is usually a fifth.
What counts as acquisition cost
Everything you spent to get the customers, divided by the customers you got. That means advertising, content, sponsorships, tooling, and the salaries of everybody doing sales and marketing. Excluding salaries is the most common way to make this number look good, and it is the most expensive line in it for most teams.
Fully loaded or not, be consistent. A payback period computed on ad spend alone is not comparable to one computed properly, including to your own figure from last quarter.
Why payback matters more than the LTV to CAC ratio
Lifetime value is a projection over years. Payback is a fact about the next few months, and it is the one that constrains how fast you can spend.
A business with a twelve-month payback needs a year of cash for every cohort it buys. The same business at six months can reinvest twice as often from the same balance. Two businesses with identical LTV to CAC ratios can have completely different growth ceilings for this reason.
What is a good payback period
For businesses selling to other businesses, under twelve months is a common benchmark and under six is strong. Products sold to consumers or small businesses usually need to be faster, because churn is higher and a long payback may never actually complete.
Sense-check it against your churn: if your average customer lifetime is shorter than your payback period, you are losing money on every customer you acquire, however good the ratio looks.
Questions
- How do you calculate CAC payback period?
- Divide customer acquisition cost by monthly gross profit per customer, which is average revenue per user multiplied by gross margin. A $133.33 CAC against $23.20 of monthly gross profit is a payback period of about 5.8 months.
- Should CAC payback use revenue or gross margin?
- Gross margin. A customer paying $29 a month does not hand you $29 towards recovering acquisition cost, because hosting, payment fees and support come out first. Using revenue understates payback by whatever your margin is.
- What should be included in customer acquisition cost?
- Everything spent to acquire the customers in the period: advertising, content, sponsorships, tooling, and the salaries of everybody doing sales and marketing. Excluding salaries is the most common way to make the number look better than it is.
- What is a good CAC payback period?
- For business-to-business products, under twelve months is a common benchmark and under six is strong. Consumer and small-business products usually need to be faster, because higher churn means a long payback may never complete.
- Why does payback matter more than LTV to CAC?
- Because lifetime value is a projection over years and payback is a fact about the next few months. Payback decides how often you can reinvest the same cash, so two businesses with identical LTV to CAC ratios can have very different growth ceilings.