CAC payback

The number of months of gross profit from a new customer it takes to recover what it cost to win them.

DefinitionThe number of months of gross profit from a new customer it takes to recover what it cost to win them.

CAC payback is how long a new customer takes to repay the sales and marketing cost of acquiring them, measured in months of gross profit. It answers a cash question the LTV to CAC ratio does not: how long the money is out before it comes back. A shorter payback means growth needs less funding.

How it is computed

CAC payback in months = customer acquisition cost ÷ (monthly recurring revenue per new customer × gross margin %). Use gross profit, not revenue, because the cost of delivering the service is not available to repay acquisition.

Example

A segment with a customer acquisition cost of $12,000, monthly recurring revenue of $1,000 per new customer and a 75% gross margin earns $750 of gross profit a month, so CAC payback is 16 months.

Where it goes wrong

Computed on revenue instead of gross profit, which shortens it by a quarter or more. Blended across segments, which hides the one that never pays back before it churns. The full guide is LTV to CAC ratio.

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