Product analytics are extremely helpful for SaaS businesses but they’re not the best metrics when it comes to revenue. On the other hand, metrics like the CAC payback period can help you keep an eye on sales and marketing costs to ensure that you maintain a healthy gross margin on new customers.
In this guide, we’re going to go over what the CAC payback period is, why it’s worth calculating, and how to reduce your customer acquisition costs altogether!
- The customer acquisition cost (CAC) tracks the amount your business spends to acquire each customer (with an industry average of $702 for SaaS companies).
- The CAC payback period tracks how long it takes for you to recoup the money you spent on acquiring the customer.
- Calculating the CAC payback period can help you analyze conversions, plan budgets, and measure retention.
- A few tactics that help you shorten the CAC payback period include:
- Personalize onboarding experiences for new customers by using data you collect from welcome surveys.
- A/B testing to see what change helps you boost conversion rates.
- Optimizing conversion funnels where you identify and remove friction to improve customer purchasing experiences.
- Driving upsells through delivering contextual upgrade prompts.
- Capitalizing on happy paths where you plan guidance to lead users through their purchasing journey.
- Preventing churn to improve retention rate and increase customer lifetime value.
- However, CAC payback calculations can struggle to factor in dynamic shifts in revenue/churn and may underestimate the value of customers who far surpass the payback period.
- Using Userpilot, you can deliver personalized onboarding, identify opportunities for improvement, etc., to reduce CAC and boost revenue. Book the demo to see how!
What is the customer acquisition cost (CAC)?
Customer acquisition cost (CAC) is a metric that tracks how much a SaaS business spends to attract and convert new customers. Data from First Page Sage places the average customer acquisition cost for a SaaS company at $702.
What is the CAC payback period?
The CAC payback period measures how long it takes for customers to pay back the customer acquisition costs that were spent on attracting and converting them in the first place.
New customers are only beneficial to a SaaS business if they don’t churn before the CAC payback period is completed.
Why should you calculate CAC payback period?
There are a few reasons why you should regularly calculate the CAC payback period:
- Conversion analysis. CAC payback periods are a good indicator of how effective your sales and marketing channels are for generating qualified leads (MQLs or SQLs) that actually turn into paying customers.
- Financial monitoring. Knowing your CAC payback period will help you plan budgets, manage free cash flow, and maintain a healthy gross margin percentage.
- Customer retention. A shorter CAC payback period indicates that both new customers and existing customers tend to stay longer — therefore validating your retention model.
How to calculate the CAC payback period?
Now that you know what the CAC payback period is and why it’s worth tracking, here’s the CAC payback period formula that you can use to run calculations for your own company’s growth.
CAC payback period formula
The CAC payback period is equal to your customer acquisition cost (CAC) divided by your monthly recurring revenue and multiplied by your gross margin.
Here’s what the formula looks like CAC Payback Period = CAC / MRR x Gross Margin
Here’s how to calculate each variable in the equation as well:
- Customer acquisition costs (CAC). CAC is equal to the total costs of sales and marketing divided by the total number of new customers acquired in the same period.
- Monthly recurring revenue (MRR). To calculate your MRR, simply multiply the total number of existing customers (on a paid plan) by the average revenue per user (ARPU).
- Gross margin. Subtract the cost of goods sold (COGS) from your revenue, divide that gross profit by the total revenue, and multiply it by 100 to get the gross margin in percentage form.
CAC payback period calculation example
If a customer costs $700 to acquire and generates $50/month in revenue (or $600/year), then that’s a CAC payback period of 14 months. If a large percentage of your total sales are generated by upsells or cross-sells then you may want to factor expansion MRR into your calculation as well.
Note: Customers may generate different amounts of revenue on a monthly/annual basis if you offer discounts on subscriptions that are billed yearly. Be sure to factor these discounts into what customers pay you on average to get the most accurate CAC payback calculation.
CAC payback period benchmarks for SaaS companies
Data from Geckoboard shows that SaaS startups average a CAC payback period of 12 months or less. On the other hand, high-performing SaaS companies tend to have a shorter CAC payback period that usually falls into the five-month to seven-month range.
How to reduce CAC payback period?
Calculating the payback period and break-even point is helpful, but reducing the CAC payback period would be far more valuable. Thankfully, there are six reliable ways to get shorter payback periods and ensure you don’t lose money on marketing expenses.
Personalize onboarding experiences for new customers
While it’s true that the cost of acquiring customers can lead to longer payback periods, failing to retain new customers tends to be far more impactful due to the lost marketing dollars. As such, you should make your best effort to retain new customers if you’re trying to get shorter CAC payback periods.
Collecting information early in the user journey through a welcome survey will help you craft a personalized customer experience from the get-go. This makes it possible to show users the most relevant features to their jobs-to-be-done (JTBD), so they not only convert but stay long-term.
Personalized experiences increase net dollar retention, which helps recoup money spent on acquisition.
Disclaimer: The welcome survey below wasn’t built by Miro — it’s a hypothetical example to showcase how easy it is to use Userpilot’s Chrome extension to build a welcome survey.
Use A/B testing to boost the conversion rate
Another way to get a good payback period is to increase the ROI on your marketing expenses. The most straightforward way to do this is by increasing the conversion rate on leads, trial users, and freemium customers.
A/B testing lets you make head-to-head performance comparisons for a landing page, marketing funnel, or any other aspect of your marketing strategy to see how changes perform against a control variant. This helps you maximize the revenue generated whenever you spend money on sales and marketing.
A single change in an in-app flow could boost conversion and get you an ROI on your initial investment:
Analyze and optimize conversion funnels
Another way to improve CAC payback periods is to optimize your conversion funnels so they drive sustainable business growth. Start by laying out the steps that a lead must take to convert into a customer, identify drop-off points, and address any potential friction areas.
For instance, Userpilot lets you generate funnel reports that show you which pages most users get stuck on so you can add contextual help through UI patterns (and other forms of in-app guidance that could improve the conversion rate):
Trigger upgrade messages to drive expansion of monthly recurring revenue
Instead of spending money on new marketing efforts and increasing your advertising costs, in-app upsells can be a cost-effective way to increase revenue. Product growth platforms like Userpilot even let you set contextual triggers for upsells.
For example, you could trigger an upsell prompt after a user finishes their onboarding flow, reaches a usage limit on their current subscription, or performs any other tracked action. You could also target specific segments with the most active customers to maximize the odds of account expansion.
Because capitalizing on upsell opportunities will be cheaper than most other marketing strategies, you’ll see your gross margin percentage increase as the average cost (marketing expense) will be less for each customer acquired.
Find happy paths to reduce the time to convert
Another way to improve the CAC payback period metric would be to reduce the time-to-convert using happy paths. To do so, start by setting starting and ending events based on user activities that you’d like to track.
Most commonly, the starting event would be a new sign-up, whereas the ending point is upgrading to a paid subscription. Once you have your starting mark and finish line charted out, you’ll be able to see the most common path that users take on their way to the endpoint.
This is their happy path.
Upon identifying the happy path, you’ll be able to add in-app guidance, messages, or prompts that bring more users onto that same path. In fact, Userpilot’s October 2023 update includes path-tracking capabilities that can help you with this process:
Prevent churn to increase the customer lifetime value
As the average time period that a customer stays with the company increases, so too does their lifetime value increase (especially if they upgrade to higher subscription tiers later in the journey). There are many churn prevention strategies that you can employ to increase retention rates.
Conducting a churn analysis and looking at cohort retention can help you identify at-risk customers before they churn. Userpilot’s retention table can show you retention rates for each cohort over multiple timescales:
Limitations of the CAC payback period calculation
While the CAC payback period helps optimize the cost of your marketing strategies, uncovers opportunities to net new MRR from existing customers, and guides your retention/pricing strategies, it does have its limitations:
- SaaS businesses. The CAC payback period can be difficult to calculate for SaaS companies due to the reliance on subscription models. Recurring revenue streams have ebb and flow due to the different segments, add-ons, or pricing tiers that could impact the LTV-to-CAC ratio.
- Churn dynamics. Because the CAC payback period is calculated using acquisition costs rather than retention rates, it may not be the most accurate representation of contemporary churn dynamics within your company.
- Myopic bias. Calculations using the CAC payback period could underestimate the long-term value of customers who renew their subscriptions for years to come (therefore surpassing the payback period by magnitudes).
To balance out your reporting, make sure to hedge the CAC payback period against reasons for churn, retention KPIs, and other important growth metrics. In the next section, we’ll look at some other metrics that you should track.
Other important metrics to track
While there’s a seemingly endless variety of SaaS metrics to look at, these seven are of particular importance:
- Monthly recurring revenue (MRR). This is the total recurring revenue generated by active subscriptions each month.
- MRR growth rate. This is the increase/decrease in recurring revenue between two or more months — with increases being driven by acquisition or expansion and decreases resulting from churn.
- Conversion rate. The SaaS conversion rate measures the percentage of leads, trial users, or freemium customers that become paid customers.
- Average revenue per user (ARPU). The ARPU measures the average revenue generated by each paying customer in a certain period.
- Customer lifetime value (LTV). A customer’s lifetime value is the total revenue generated throughout the full course of their relationship with a business.
- Retention rate. The retention rate is the percentage of customers who are retained over a certain period of time.
- Churn rate. Churn rates measure the percentage of customers who cancel their subscription (either intentionally or through involuntary churn) during a specific time period — usually a month or year.
As you can see, getting a good CAC payback period is simply a matter of tracking the right metrics, maximizing lifetime values, getting the most out of every marketing expense, and avoiding new operational costs that could skew the LTV:CAC ratio.
Of course, there are other metrics that you should be tracking to ensure you get a holistic view of the user journey and your growth trajectory. If you’re ready to start reaping the benefits of advanced analytics and personalized in-app experiences, then it’s time to get your free Userpilot demo today!