CAC Payback Period: How to Calculate and Reduce It?

Reducing the CAC payback period can help SaaS companies boost their financial performance and drive growth.

Our guide explores:

• What exactly CAC payback is.
• Why you should be tracking it.
• How to calculate the CAC payback period for your SaaS.
• What other metrics you need to track.
• How to reduce your CAC payback period.

We also look at how Userpilot can help you do the job.

Let’s get right to it!

What is CAC payback?

CAC payback period, or Customer Acquisition Cost payback period, is a metric that tells you how long it takes for a company to earn back the money invested in acquiring customers, or in other words, the break-even point.

Marketing and sales teams use the metric to assess the efficiency and effectiveness of their company’s customer acquisition efforts. It can also provide insights into the effectiveness of your customer onboarding processes and account expansion initiatives.

Why is tracking the CAC payback period important?

There are 3 main reasons why a SaaS company should track the CAC payback period.

Let’s break them all down.

Helps to choose the right customer acquisition channels

One way to leverage the CAC payback metric is to identify the best customer acquisition channels for your product, like content marketing, PPC, or email marketing. This enables you to allocate your resources to the channel with the best ROI.

The CAC payback period gives you a more complete picture than CAC alone. That’s because it takes into account not only the cost of acquiring customers but also how much revenue each channel brings.

Reveals inefficiencies in your retention strategies

The CAC payback period can also reveal leaks in your customer retention funnel.

Basically, when the payback period is longer than expected, it can indicate that there are issues in your customer retention strategy. These could include inadequate onboarding and customer support or ineffective engagement strategies.

Informs your pricing strategy

The CAC payback metric is widely used to make informed product pricing and positioning decisions.

In short, how much you charge affects how easy it is to attract new customers on the one hand and how much revenue your product generates on the other.

For example, if you position your product as an enterprise solution with a premium price tag, your sales team might have to do a bit more legwork to acquire customers, which increases the acquisition costs.

Tracking the CAC payback data and related metrics can help you design the most optimal pricing model for your SaaS.

Limitations of the CAC payback period

The CAC payback metric has a number of limitations.

First, calculating the actual customer acquisition costs is quite challenging. There are a number of factors that affect it. It’s also not a one-off expense, as the costs can accumulate over a period of time.

In the same way, the metric doesn’t account for customer lifetime value but only the average revenue per user per month, and it doesn’t differentiate between high- and low-value customers either.

Who monitors the CAC payback period metric?

The CAC payback metric is of interest to multiple stakeholders across the organization.

The marketing and sales teams monitor this metric to assess and optimize the effectiveness of the customer acquisition and retention strategies.

Product managers can use the metric to assess the impact of new features and product changes on customer acquisition and retention, while the customer success teams to better understand the value of different customer segments and how to drive account expansion effectively.

Finally, tracking the metric enables the finance team to budget effectively and assess the financial health of the product, while the senior leaders use it to inform the organizational and product strategy.

What is a good CAC payback period for a SaaS business?

The CAC payback period benchmarks may vary, depending on the product as well as your niche.

For most SaaS companies, the CAC payback period of 12 months or less will be good enough. You’re doing well if you manage to get within the 5-7 month bracket.

Large enterprise companies with better access to capital can afford to have longer payback periods.

How to calculate CAC payback period?

The CAC payback period formula is pretty straightforward:

CAC Payback Period = Customer acquisition cost / (Net new MRR acquired * Gross margin)

To calculate it, you need:

• Customer Acquisition Cost (CAC) – combined sales and marketing expenses.
• Monthly Recurring Revenue (MRR) – for example from subscriptions.
• Gross margin % – profitability of the company’s core business operations after accounting for the cost of providing the product – (Gross profit/Total Revenue) x 100

In practice, the CAC payback period calculation may not be that easy, though, as it may be difficult to determine the actual costs of acquiring customers.

Key SaaS metrics to track along the CAC payback period

In addition to CAC payback, there are a couple more metrics that you should track to better evaluate the long-term financial performance of the product.

• Customer Lifetime Value (CLV or CLTV) is a measure of the total average revenue a customer brings during their business relationship.To calculate it, multiply the average purchase value by the average purchase frequency rate and then by the average customer life span.For example, if your customer subscribes to your lowest $10/month plan and remains your customer for 18 months, the CLTV is $180.

• LTV:CAC ratio is another metric that puts the customer acquisition cost in context. A good LTV:CAC is 3:1 – if your product performs at this level, it doesn’t really matter that the cost of acquiring customers is high.In contrast to the CAC payback period, this metric provides insights into the long-term effectiveness of your acquisition, retention, and expansion efforts.

Tips for reducing the CAC payback period metric

So how do you reduce the CAC payback period?

Basically, you can pull two levers. You can reduce your acquisition costs or increase the revenue that your customers generate.

Let’s look at a few ways you can do this.

Incorporate product-led growth strategies to lower acquisition costs

Implementing product-led growth strategies can significantly reduce acquisition costs.

While you still need to invest in marketing to attract user attention, they require far less hand-holding once they sign up for the product.

For example, in-app onboarding and self-service support enable them to explore the product and experience its value without assistance from the customer success or support teams. Many of them will be happy to make even big purchases by credit card without even talking to Sales.

Satisfied customers will also help you promote your product and acquire new users through word-of-mouth (WOM) marketing and referral schemes, which reduces marketing costs.

Focus on the most cost-effective acquisition channel

As mentioned, the CAC payback metric can reveal how effective each acquisition channel is.

Once you know which channel performs best, simply focus most of your efforts on that particular channel.

For example, in its early days, Userpilot tried a number of different marketing strategies. As content marketing generated the most leads, that’s what we prioritized (and still are) to drive growth.

This doesn’t mean that you should dismiss other channels, though.

Instead, look for ways to gradually improve the performance of the other channels. For instance, even if face-to-face sales have the best CAC payback, developing self-service channels may help you scale up the business in the long run.

Iterate on your SaaS pricing model

Tweaking your pricing is an obvious way to improve your CAC payback period.

It’s far from straightforward, though, and it requires a fair bit of testing.

Increasing prices can potentially generate more revenue but also could increase the CAC because customers may perceive your product as less competitive.

Lowering prices, on the other hand, could reduce the CAC costs significantly enough that it will make up for the loss in revenue.

However, if the price is low (or you decide to offer a free plan), your product may attract lots of unqualified sign-ups who have no intention of subscribing to the paid plan and who will still put a strain on your customer support teams.

Apart from prices, you can also experiment with payment frequency (monthly vs. annual subscription) or usage-based pricing.

Invest in customer retention strategies

If customers churn before you recoup the cost of acquiring and supporting them, your CAC payback figures will suffer.

What retention strategies can you implement to reduce the churn rate?

Start by creating frictionless sign-up flows so that users can get inside the product as soon as possible. This will reduce the time to value – and risk of churning.

To further reduce the time users need to experience the Aha! moment, invest in personalized onboarding experiences that help users discover relevant features. Try checklists and interactive walkthroughs to start with.

As users are exploring the product, track their progress and offer contextual in-app support to remove friction and drive engagement. Use in-app surveys to collect feedback to gain a better understanding of user needs and pain points. And act on the insights!

Trigger contextual upsell and cross-sell messages to existing customers

In-app messages can also help you maximize account expansion opportunities and further reduce CAC payback.

As you’re already tracking product usage, you will know which users are ready to upgrade to the paid or higher plan. You can target such users with upsell and cross-sell messages to prompt them to upgrade.

It’s best to trigger such messages contextually, at the moment when the user may need the premium functionality.

Foster knowledge sharing with sales and marketing teams

While some users may be happy to upgrade to a higher plan in-app, others may need a bit more love from your sales team before they commit. It’s particularly the case with high-value customers that can contribute considerably to your bottom line.

To effectively identify and target such customers, your product, marketing, and sales teams need to have easy access to reliable product usage data of different customer segments.

How Userpilot can help you reduce CAC payback periods?

Userpilot is a product adoption platform that can help you reduce your CAC payback period.

You can use it to:

• Design personalized onboarding experiences to drive product adoption and retention.
• Drive with upsells with in-app messages (modals, tooltips, hotspots).

• Collect customer feedback to gain insights into user problems, needs, and preferences.
• Track product usage data and customer in-app behavior to find friction points leading to churn and make informed product development decisions.

Conclusion

CAC payback period helps SaaS businesses assess the effectiveness of their marketing, sales, retention, and growth strategies. Teams can use it to reduce cost acquisition costs and drive revenue growth.

If you want to see how Userpilot can help your SaaS reduce your CAC payback period, book the demo!