July 18, 2022

CAC Payback with Gross Margin | Storytelling With Data

Maggie Paul
Marketing Coordinator

This is a bonus piece in our series, "Finance: Storytelling with Data" where we break down how to tell the story of your business using your own financial data. Catch up on the previous parts below:

Part One: Using Your Financial Data to tell Your SaaS Business' Story

Part Two: What Has My SaaS Business Achieved?

Part Three: How Do I Think My Company Will Grow in the Future?

Part Four: How Much is Left After I Deliver My Product or Service?

Part Five: How Do I Acquire New Customers?

Finance: Storytelling with Data

Bonus Piece: CAC Payback with Gross Margin

During Part Five of our Storytelling with Data series we asked the question: How do I acquire new customers? We went over customer acquisition strategies and channels, and with that in mind, asked the question of how much was the cost of acquiring those customers. Every company should know what it costs to acquire a customer.  This is known as your CAC (customer acquisition cost). However, CAC isn’t the most informative metric on its own. In order to use your CAC as a useful tool we need to input factors to determine things like, is a CAC of $500 good or bad?  Determining factors can include:

  1. how much does your average customer bring you in revenue (your customer lifetime value), and
  2. how long it takes to recover these costs (i.e. when will you break even on this investment)

We have previously talked about LTV and the LTV:CAC ratio. Now we can look into the second point, how long it takes to recover your customer acquisition costs, known as the CAC payback period.

The formula for calculating CAC payback period is simple. Take your CAC and divide it by the average monthly revenue for a customer.  This will give you how many months it takes to recoup the money spent to acquire a customer.

For example, our company sells a subscription to a customer for $10 a month and it costs them $50 to acquire this customer. Simple math tells us we should break even in 5 months ($50 CAC / $10 monthly revenue = 5 months CAC payback).  So as long as our customer stays with us for 5 months, the acquisition has been profitable.

However, does this answer paint the full picture? To truly determine your CAC as a metric, we recommend companies to take it one step further and calculate your CAC payback period  with gross margin consideration (similar concept as how you should calculate your LTV with gross margin).

Your gross margin represents how much is left after you deliver your product / service.  CAC payback with gross margin tells the whole story. In our example let’s say our gross margin is 60%.  How does this change the story?  Our CAC payment period is now 8.3 months ($50 CAC / ($10 revenue x 60% margin)).

What happens if our average customer stays with us for 7 months?  Calculating CAC payback without gross margin might lead us to believe we can turn a profit based on our current customer acquisition strategies (Our new 7 months is greater than the original 5 months it took to make a return on investment).  

This conclusion could be detrimental to your business as you’d actually be losing money on each customer ($70 of revenue over 7 months x 60% gross margin = $42, which is less than the $50 you spent to bring that customer on board - you’d be losing $8 on each customer).

Knowing how to use your customer acquisition cost will best allow your company to make informed decisions. Following this example demonstrates the importance of factoring in all essential information into your CAC calculations to ensure your final answer is the correct answer before making financial decisions that impact your company’s future.

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