2024 CODiE Finalist
Softrax

Customer Acquisition Cost (CAC) Payback

What is CAC Payback?

CAC Payback, also known as Customer Acquisition Cost Payback, is used by businesses to assess the efficiency and effectiveness of their customer acquisition efforts. It measures the amount of time it takes for a company to recoup the cost of acquiring a new customer through their revenue generated from that customer.

What is CAC Payback Period?

CAC Payback Period measures the time it takes for a business to recover the cost incurred to acquire a new customer through the revenue generated from that customer.

Why is CAC Payback Important?

CAC Payback allows a company to measure the cost of acquiring customer against the time it takes that customer to generate revenue. It lets a company measure the efficacy of its customer acquisition costs, including marketing spend, against the amount of revenue that a customer generates. A shorter CAC Payback Period is often associated with a more efficient and sustainable customer acquisition strategy. However, CAC payback can show variance depending on the industry or individual company’s business model. Some businesses, especially those with subscription-based models, may accept longer payback periods if they anticipate strong customer lifetime value and retention.

What is the Formula for CAC Payback?

Calculating CAC payback involves the Customer Acquisition Cost, or the total cost for acquiring a new customer, including expenses related to marketing, advertising, sales efforts, and other like costs. It also involves the Monthly Gross Margin per Customer, which is the monthly revenue generated from a customer minus the variable costs directly associated with serving that customer on a monthly bais.  

The formula for calculating CAC Payback is: 

CAC Payback Period = CAC (Customer Acquisition Cost) / Monthly Gross Margin per Customer 

The resulting CAC Payback Period represents the number of months it will take for the company to recover the cost of acquiring a customer through the profits generated from that customer. A shorter payback period is generally more favorable, as it indicates that a company can recoup its customer acquisition costs relatively quickly. 

How to Calculate CAC Payback: Example

The formula for calculating CAC payback period is:

CAC Payback Period = CAC / Monthly Gross Margin Per Customer

First, a company should calculate the Customer Acquisition Cost (CAC), or the total cost incurred to acquire a customer. This includes all marketing and sales expenses related to acquiring new customers. Below is a sample of spend and acquired customers.

Monthly Cost of Sold Goods
Customers Acquired
$30,000
500

To first calculate the CAC, you would divide $10,000 by 500, giving you an answer of $20 per customer.

A company should then determine the Monthly Gross Margin Per Customer, which is the revenue generated from a customer minus the direct costs of serving or delivering the product or service.

Revenue Generated
Monthly Cost of Sold Goods
Customers Acquired
$30,000
$10,000
500

Using the table above, we can calculate the Monthly Gross Margin Per Customer.  

($30,000 – $10,000) / 500 = $40 per customer. 

Finally, to calculate the CAC Payback Period, a company can use the formula:

CAC Payback Period = CAC / Monthly Gross Margin Per Customer

For our example, it would be $20 / $40 = 0.5 months for the CAC Payback Period.

What is the Difference Between CAC Ratio and CAC Payback?

CAC Ratio, sometimes referred to as the CAC-to-LTV (Customer Acquisition Cost to Customer Lifetime Value) ratio, compares the cost of acquiring a customer (CAC) to the expected revenue generated from that customer over the length of their relationship with the company.

CAC Payback is used by businesses to assess the efficiency and effectiveness of their customer acquisition efforts. It measures the amount of time it takes for a company to recoup the cost of acquiring a new customer through their revenue generated from that customer. 

How Can a Company Improve the CAC Payback Period?

A shorter CAC Payback Period allows a company to recover its customer acquisition costs more quickly, which can improve cash flow and overall profitability.

Strategies to do this include:

Target High-Value Customers: A company can make an effort to attract customers who are likely to generate higher revenue and profits over time through targeted marketing efforts.

Optimize Marketing Channels: A company should analyze the market channel performance to identify those yielding the lowest CAC and shift its budget towards the most cost-effective channels and tactics.

Improve Conversion Rates: Work on optimizing conversion rates at each stage of the customer journey, from initial awareness to purchase. A higher conversion rate means a company acquires more customers for the same marketing spend.

Reduce Sales Cycle Time: Streamline the sales process to reduce the time it takes to convert leads into paying customers. This can include improving sales team efficiency, providing better sales training, or implementing automation in the sales funnel.

Improve CAC Payback

Can't find the right definition?

We can help.

FREE CPE WEBINAR
00
Days
:
00
Hours
:
00
Minutes
WATCH THE WEBINAR NOW