Sales and lead qualification teams (SDRs or BDRs), long sales cycles, live events with a flashy booth and all the swag, building a new category from the ground-up, or building a brand that can win market share from existing leaders, running a partner program, paid advertising, content marketing, social media, PR, and the marketing and sales technologies that make it all work — you get the picture.
It takes a lot of time, effort, and resources to drive new and expansion bookings. Are you getting enough bang for your buck? In other words, is the business growing enough to justify your sales and marketing spend? Is it growing fast enough to confirm your tactics are working?
There’s only one way to know for sure: look at your customer acquisition cost (CAC) payback period.
What is CAC Payback Period?
CAC payback period is an important metric in SaaS that tells you how long it takes to effectively pay for your customer acquisition costs with the revenue generated from your sales and marketing investments.
Why payback period is important in SaaS
The CAC payback period measures the efficiency of your sales and marketing efforts. For example, if you're spending too much on sales and marketing, you run the risk of taking too long to pay back your customer acquisition costs, and that can eat up your startup's runway.
If churn is also high, your EBITDA margin will suffer too. A good CAC payback period, on the other hand, gives you the green-light to invest more into sales and marketing to accelerate revenue growth.
What is a good CAC payback period?
A good rule of thumb is to keep your CAC payback period less than 12 months, or 1 year. Early-stage SaaS startups may have higher payback periods or lower when running very lean, and they're likely to fluctuate quite a bit as the company grows and adapts; but it's never too soon to start tracking and set your North Star to SaaS industry averages.
SaaS payback period benchmarks
According to the latest SaaS Index, presented in partnership with Blossom Street Ventures, the median payback period for publicly traded SaaS companies is 1 year.
Publicly-Traded SaaS Index
Get valuable insights from SaaS industry metrics to develop strategies that maximize your enterprise value. The SaaS Benchmarks Report offers an at-a-glance look at public SaaS company metrics, including revenue multiples, annual growth, and more.
CAC Payback Formula
Use this formula to calculate your CAC payback period:
Q2 Sales and Marketing Expenses __________________________________ | = CAC Payback Period |
(Gross Margin Q2 – Gross Margin Q1) × 4 | |
Notice the denominator is expressed as an annualized number, and there are a few reasons for this:
When analyzing a company, we often look at how the company is performing each year and therefore use the year as the period for comparison.
Products sold by most SaaS companies tend to have annual contracts and it makes sense for our metric to align with this time period.
SaaS payback period calculation example
In August, SaaS Co., an online social networking platform for SaaS entrepreneurs, spent $1,000 on pay-per-click advertising, $3,000 for print advertisements, and $6,000 for one Sales Representative to reach out to the leads generated from the new marketing campaign. Through the outreach and marketing, SaaS Co. generated 100 new customers, all of which purchased annual subscriptions for $5/month. We also know that SaaS Co.’s product is fully developed and only costs $50/month for unlimited hosting.
Here’s a breakdown of their relevant financials:
SaaS Co. | | |
|---|---|---|
| Jul-15 | Aug-15 |
Revenue | | |
Monthly Subscriptions | $23,500 | $24,00 |
Total Revenue | $23,500 | $24,000 |
| | |
COGS: Hosting | 50 | 50 |
Total COGS | 50 | 50 |
Gross Margin | $23,450 | $23,950 |
| | |
Sales and Marketing | | |
Pay Per Click | $1,000 | $1,000 |
Print Ads | $3,000 | $3,000 |
Sales Rep Salary | $6,000 | $6,000 |
Total Sales and Marketing | $10,000 | $10,000 |
Above, we can see that the business increased its gross margin $500, or $6,000 when annualized. We also know the total sales and marketing expenses were $10,000 for the month.
So, we can calculate the following CAC payback for SaaSy Co.:
(Total Sales and Marketing: $10,000) | = 1.67 CAC Payback |
(Annualized Incremental Gross Margin: $6,000) | |
How do we interpret this data?
CAC payback is 1.67 years, which is how long it will take SaaS Co. to recover its initial investment in sales and marketing for August.
Note that in this example, we assumed that all new customers acquired in August were a direct result of sales and marketing efforts in August. However, most businesses have a lag time between the sales and marketing efforts and bookings. Directly matching the revenue earned with respective sales and marketing spend can be challenging and time consuming, so simplifying it as we've shown here serves as a helpful proxy.
At Lighter Capital, we use CAC payback to evaluate revenue loan applicants because it gives us a good and fast estimation of the amount of time it will take a SaaS startup to recover its investments in sales and marketing, which is often how founders use our funding.
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