The CAC Payback Period measures cash flow efficiency

While the LTV to CAC ratio measures the long-term viability of a subscription business, the Customer Acquisition Cost (CAC) Payback Period measures its short-term cash flow efficiency. It answers the critical question: "How many months does it take to earn back the money we spent to acquire a new customer?"

This is a crucial metric because in most subscription models, the upfront cost to acquire a customer (CAC) is significantly higher than the initial monthly recurring revenue (MRR) they generate. This creates a cash trough; the more you grow, the more cash you burn in the short term. The CAC Payback Period quantifies the depth and duration of that trough.

Calculation

A common way to calculate the CAC Payback Period is:

CAC Payback Period (in months) = CAC / (Average MRR per customer × Gross Margin %)

CAC: The total cost to acquire a new customer.
Average MRR per customer: The average monthly recurring revenue from that customer.
Gross Margin %: The percentage of revenue left after accounting for the direct costs of serving the customer.

Benchmarks

An acceptable payback period depends on the business model and customer base:

< 12 Months: Generally considered very good and efficient.
12-24 Months: Often acceptable, especially for enterprise customers with low churn.
> 24 Months: May be a cause for concern, as it puts a significant strain on cash flow.

A shorter payback period means the business becomes cash-flow positive on a new customer more quickly, reducing the need for external capital to fund growth. This is a key consideration when choosing between different funding strategies.