The formula
CAC payback, in months
CAC payback = CAC ÷ (New MRR per customer × Gross margin)
Customer acquisition cost
CAC = Sales and marketing spend ÷ New customers won
At company level you can skip the per-customer step: sales and marketing spend for the period divided by (new MRR won in the period × gross margin). Same answer.
A worked example
Example, fictional figures
Sales and marketing spend over the quarter: $300k
New customers won: 60. CAC = $5,000
Average new MRR per customer: $500
Gross margin: 80%, so $400 of gross profit a month
CAC payback = 5,000 ÷ 400 = 12.5 months
What a good CAC payback looks like
| CAC payback | How I read it |
|---|---|
| Under 12 months | Great. The usual target when selling to small businesses. |
| 12 to 18 months | Fine, especially for mid-market contracts. |
| 18 to 24 months | Only with large customers who rarely leave. |
| Over 24 months | You are financing your customers with investors' money. |
Payback only counts if the customer stays
A 15-month payback with customers who stay 18 months on average leaves you three months of profit per customer. That is a thin business. Read CAC payback next to net revenue retention: good retention makes a long payback survivable, poor retention makes a short one misleading.
Four mistakes that flatter it
- Revenue instead of gross profit. The example above drops from 12.5 to 10 months. It looks better. It is wrong.
- Ads only. Leaving out sales salaries, commissions and tools. CAC is everything you spend to win customers.
- Expansion in the denominator. Upgrades from existing customers were not bought by this quarter's acquisition spend. New customers' MRR only.
- One blended number. A blended 12 months can hide one channel at 6 and another at 30. Split paid from organic at least.
CAC payback vs LTV:CAC
LTV:CAC compares a customer's lifetime value with what they cost to win, and 3:1 is the usual target. The catch: lifetime value is a forecast, built on a churn assumption you probably made up. Payback is a measurement. I trust the one that needs fewer guesses.
For the company-wide view, put it next to the burn multiple and the magic number. George reads all three every month, and asks about the one that moved.