The customer acquisition cost (CAC) payback period is the time it takes for a business to recover the cost of acquiring a new customer. This metric measures how long it takes for a customer to generate enough revenue to cover the initial cost of acquiring them and helps assess the efficacy of a business’s marketing and sales strategies.

Below, we’ll cover how to calculate the CAC payback period, why it’s important for businesses, benchmarks you should know, and the difference between the LTV:CAC ratio and the CAC payback period.

What’s in this article?

• How to calculate the CAC payback period
  
• Why the CAC payback period is important for businesses
  
• Methods for reducing the CAC payback period
  
• Benchmarks for the CAC payback period
  
• LTV:CAC ratio vs. CAC payback period: What’s the difference?
  

How to calculate the CAC payback period

To calculate the CAC payback period, follow these steps:

• Determine the cost spent on acquiring customers. This includes all marketing and advertising expenses, sales team costs, and any other direct costs involved in acquiring new customers over a specific period.

• Divide this cost by the number of customers acquired in the same period to calculate the CAC.

• Next, calculate how much profit each customer generates monthly. This is usually the revenue from the customer minus the costs of serving the customer (e.g. support and service costs).

• Divide the CAC by the monthly profit per customer to calculate the CAC payback period. This result tells you how many months it takes for a customer to generate enough profit to cover the acquisition cost.

Formulas

• CAC = Acquisition Costs / Number of New Customers Acquired

• Monthly Profit per Customer = Monthly Revenue per Customer - Monthly Costs per Customer

• CAC Payback Period = CAC / Monthly Profit per Customer

An example calculation

Let’s say a business spends £50,000 on marketing and sales efforts and acquires 500 new customers. The monthly revenue per customer is £100, and the monthly cost per customer is £20.

CAC = £50,000 / 500 = £100 per customer

Monthly Profit per Customer = £100 - £20 = £80

CAC Payback Period = £100 / £80 = 1.25

This result indicates it takes about 1.25 months for the business to recover the cost of acquiring a new customer.

Why the CAC payback period is important for businesses

The CAC payback period is an important standard for businesses. Here’s why it matters and what it can tell you:

• Cash flow: The CAC payback period affects a business’s cash flow. If the period is short, the business is quickly recovering its investment in acquiring new customers and maintaining a healthier cash flow. This improves the business’s operational viability, especially for startups and growth-stage businesses that might be operating with limited cash reserves. A shorter payback period lets a business reinvest in further growth initiatives sooner, improving its ability to scale.

• Marketing and sales: The CAC payback period helps businesses evaluate the effectiveness of their marketing and sales strategies. A long CAC payback period might indicate the business is spending too much to acquire customers who do not generate sufficient short-term revenue quickly enough. Conversely, a short payback period suggests marketing and sales efforts are effective and cost-efficient. This insight helps businesses adjust their strategies to fine-tune spending and targeting.

• Profitability and sustainability: The length of the CAC payback period can also indicate the overall profitability and financial health of a business. A shorter period suggests the business model is sustainable as revenue generated from customers quickly covers the acquisition costs. This demonstrates that the business can continue to fund its operations and growth without infusions of external capital.

• Investor confidence: Investors look at the CAC payback period to assess the risk and potential of their investments. A business that can quickly recover its customer acquisition costs is often seen as a safer, more attractive investment. This metric reassures investors that the business manages its resources wisely and that it has a flexible business model.

• Calculated decision-making: Understanding the CAC payback period helps executives make informed decisions about where to allocate resources. For instance, if a business determines certain products or customer segments have shorter payback periods, it might focus more on those areas. If some campaigns consistently show longer payback periods, the business might consider revamping or discontinuing them.

Methods for reducing the CAC payback period

Here are strategies to cut the length of the CAC payback period:

Improve customer acquisition funnel

• Use granular segmentation to identify high-value customer profiles with shorter sales cycles and higher lifetime value (LTV).

• Personalise marketing and sales communications for specific customer segments, addressing their challenges and showcasing relevant solutions.

• Use analytics and attribution modelling to track campaign performance, identify bottlenecks in the funnel, and allocate resources accordingly.

• Implement marketing automation tools for repetitive tasks, to nurture leads, and to reveal prospects based on engagement levels.

• Diversify acquisition channels, and experiment with new strategies to reach a broader audience and identify the most cost-effective sources of leads.

Improve sales and onboarding processes

• Empower sales representatives with the training, resources, and tools they need to efficiently close deals and guide customers through a simple onboarding experience.

• Implement self-service onboarding options, interactive tutorials, and proactive customer support to reduce friction and accelerate time to value (TTV) for new customers.

• Identify key activation milestones that correlate with long-term customer retention, and prioritise driving users to achieve these milestones early.

Maximise customer expansion and retention

• Identify opportunities to upsell existing customers on higher-tier plans or cross-sell complementary products, services, or both.

• Invest in proactive customer success initiatives such as personalised support, educational resources, and community forums to drive adoption, engagement, and loyalty.

• Analyse customer churn data to identify patterns and causes, implement targeted retention strategies, and address customer concerns before they escalate.

Refine pricing strategies

• Match pricing with the perceived value your product or service delivers to customers to make sure you’re capturing the full value you offer.

• Offer a range of pricing options to cater to different customer segments and budgets, creating easier entry points and more upselling opportunities.

• Consider a usage-based pricing model in which customers pay for what they consume, aligning costs with value and potentially accelerating revenue recognition.

Implement product-led growth (PLG)

• Offer a free tier or trial period to attract users, demonstrate value, and convert them into paying customers.

• Use a self-service model to encourage users to explore and adopt your product independently with intuitive interfaces, comprehensive documentation, and accessible support resources.

• Encourage user-generated content, referrals, and social sharing to amplify reach and organically acquire new customers.

Encourage collaboration

• Your sales and marketing teams should closely collaborate for consistent messaging, efficient lead handoff, and shared accountability for revenue goals.

• Integrate customer success into the customer acquisition process to provide early support, gather feedback, and identify opportunities for expansion.

Benchmarks for the CAC payback period

CAC payback period benchmarks contextualise how your business’s customer acquisition efforts are performing compared with industry standards and those of your competitors. Certain industries, such as healthcare or finance, might have unique regulations or buying processes that affect the payback period, so it’s best to compare directly with businesses similar to yours. Here’s what you need to know:

SaaS businesses

A CAC payback period of 12 months or less is typically considered healthy for software-as-a-service (SaaS) businesses, meaning you’re recouping your customer acquisition costs within a year. High-performing SaaS businesses often achieve a CAC payback period of five to seven months, indicating a highly effective customer acquisition process and faster path to profitability.

B2B vs. B2C businesses

Business-to-business (B2B) businesses often have longer sales cycles and higher CACs, leading to longer payback periods compared with business-to-consumer (B2C) businesses. For B2C businesses, a CAC payback period of 12 months or less is often considered a good benchmark, while B2B payback periods can exceed 12 months depending on the type of business.

Enterprise customers vs. SMB customers

Selling to enterprise customers usually involves higher annual contract values (ACVs) but also longer sales cycles, potentially extending the payback period compared with selling to small and medium-sized businesses (SMBs).

Benchmarks for business stages

• Early-stage startups: Early-stage businesses can have longer CAC payback periods because they invest heavily in customer acquisition to build their initial customer base and establish product-market fit.

• Growth-stage businesses: As businesses mature and improve their customer acquisition processes, they often see their payback periods get shorter.

• Publicly traded businesses: Public businesses often have well-established customer acquisition channels and predictable revenue streams, leading to shorter payback periods compared with those of earlier-stage businesses.

LTV:CAC ratio vs. CAC payback period: What’s the difference?

The CAC payback period should be assessed in conjunction with the customer LTV. A healthy business model has an LTV that greatly exceeds the CAC, ensuring long-term profitability. When assessing customer acquisition efforts, it’s best to look at the LTV:CAC ratio and the CAC payback period. Here’s a rundown of the difference between these metrics:

LTV:CAC ratio

The LTV:CAC ratio measures the relationship between the revenue a customer generates over their relationship with the business (LTV) and the cost of acquiring that customer (CAC). It’s typically expressed as a multiple, such as 3:1, which means that for every £1 spent on acquiring a customer, the business generates £3 in revenue over the customer’s lifetime.

The LTV:CAC ratio is primarily concerned with the long-term profitability and return on investment (ROI) of customer acquisition efforts. It indicates whether a business is generating enough revenue from customers to justify the costs of acquiring them.

A generally accepted benchmark for a healthy LTV:CAC ratio is 3:1 or higher. This means the customer lifetime value is at least three times greater than the cost of acquisition.

Formula: LTV:CAC Ratio = LTV / CAC

CAC payback period

The CAC payback period measures the time it takes for a business to recoup the cost of acquiring a new customer through customer revenue. It is expressed in months. The CAC payback period is primarily concerned with the shorter-term efficacy of customer acquisition efforts and cash flow. It indicates how quickly a business can start generating profit from newly acquired customers.

Formula: CAC Payback Period = CAC / Monthly Profit per Customer