What is Months to Recover CAC?
Months to recover CAC, also known as CAC payback period, is a metric that shows the amount of time (measured in months) required to recover investments in customer acquisition. In other words, it indicates how quickly the company’s investment in customer acquisition reaches a break-even point.
SaaS companies and other subscription-based companies typically employ the months to recover CAC metric. Companies operating on a subscription basis must spend funds to acquire new customers. They then receive revenue from the customers over multiple periods (e.g., monthly revenue).
Generally, a company must recover its customer acquisition costs within a year (many successful SaaS companies are able to recover CAC in five to seven months). However, for many early-stage companies, the payback period commonly goes beyond 12 months. A reduction in the payback period over time is one of the best indicators of growth for such companies.
Months to Recover CAC Formula
The months to recover CAC can be calculated by dividing the customer acquisition cost (CAC) by the company’s gross margin. Mathematically, the metric can be expressed using the following formula:
- CAC – Customer Acquisition Cost
- ARPA – Average Revenue Per Account
- Gross Margin (%) – Gross Margin (expressed as a percentage)
Note that the metric is calculated using gross margin. The rationale behind this is that a company must generate some operating profits in order to recover its customer acquisition cost.
Importance of Months to Recover CAC
The importance of this metric cannot be underestimated. The payback period provides some critical insights into the company’s capital and acquisition efficiency. In other words, the metric indicates how efficiently a company spends its money to attract new customers and how well it can sustain its acquisition strategies in the long term.
A long CAC payback period is generally an indicator that a company needs to improve its acquisition efficiency. Commonly, there are two key areas for improvement: customer acquisition cost and customer monetization.
Problems with customer monetization indicate that the company is experiencing difficulty with translating its acquisition strategies into actual profits. Frequently, companies that face problems with customer monetization try changing the pricing plans offered to customers.
CFI is the official provider of the Financial Modeling and Valuation Analyst (FMVA)™ certification program, designed to transform anyone into a world-class financial analyst.
To keep learning and developing your knowledge of financial analysis, we highly recommend the additional CFI resources below: