Payback period
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The number of months it takes to recoup the cost of acquiring a customer. Shorter is better for cash flow.
Payback period answers a simple question: how long until a new customer pays back what it cost to acquire them? If your CAC is $18k and the customer pays $2k per month at 80% gross margin, you earn $1,600 in gross profit per month. Payback period: $18k / $1,600 = 11.25 months.
Payback period is the cash flow cousin of LTV/CAC. A company with great LTV/CAC but a 24-month payback period needs a lot of cash to fund growth. Every new customer costs $18k today and takes two years to pay back. If you are growing fast, you are writing checks for a long time before the returns arrive.
The best SaaS companies have payback periods under 12 months. Under 6 months is exceptional. Above 18 months is dangerous unless you have deep pockets or very patient investors.
Examples
A PLG company with fast payback.
CAC: $500 (mostly from content marketing). Monthly revenue per customer: $99. Gross margin: 85%. Monthly gross profit: $84. Payback: 6 months. Cash-efficient growth.
An enterprise company with long payback.
CAC: $120k (field sales, travel, lengthy POC). ACV: $150k. Gross margin: 80%. Annual gross profit: $120k. Payback: 12 months. Acceptable for enterprise but the company needs capital to fund the wait.
Payback period drives hiring decisions.
The CFO calculates that adding five more BDRs increases monthly CAC by $80k but should generate $200k in new MRR within six months. Payback on the sales investment: under 6 months. She approves the headcount.
In practice
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Frequently asked questions
What is a good payback period for SaaS?
Under 12 months is good. Under 6 months is excellent. Above 18 months is concerning. Enterprise companies with high ACV can tolerate longer payback periods because the eventual LTV justifies the wait.
How do you calculate payback period?
Divide CAC by monthly gross profit per customer. Monthly gross profit equals monthly revenue times gross margin percentage. If CAC is $12k and monthly gross profit is $1,500, payback is 8 months.
Related terms
The total cost of sales and marketing divided by the number of new customers acquired in a period.
The total gross profit expected from a customer over the entire relationship. LTV determines how much you can spend to acquire them.
Lifetime value divided by customer acquisition cost. The fundamental unit economics equation for any subscription business.
Revenue minus cost of goods sold, expressed as a percentage. For SaaS, this is revenue minus hosting, support, and delivery costs.
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