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CAC payback period: the definite guide.

The CAC payback period is the key metric for digital businesses who want to grow sustainably.

The balance between Customer Lifetime Value (LTV) and Customer Acquisition Cost (CAC) tell us whether our business is sustainable or not.

But it doesn’t tell us whether we can grow sustainably or not.

Imagine you have invested a certain amount of money in marketing and communication to acquire new customers.

How long does it take to have your money invested in CAC back to be re-invested in a new acquisition cycle?

The answer is the CAC payback period. And now I show you everything about.

Business data

Let’s start from assuming some essential data about the business we are running. These data may come from our business statistics, in case the business is being running for years, or we can just assume them because we want to analyse a new business opportunity.

The average sale contribution margin is €10. The sale ticket and the direct costs considered to compute the contribution margin are out of our interest for this analysis. We just know that, on average, every sale is “worth” €10.

Beside this assumption, let’s consider that the average customer gets back to buy from us other three times, raising his LTV from €10 to €40.

Finally, the CAC is assumed to be €25, leading to a balance LTV – CAC equal to €15. This means that there are the conditions to go further in the analysis because the average customer pays out his acquisition cost and leaves some money to bear all the fixed costs.

Customer useful life

How does the customer generate such value for our business? Let’s try to draw down his life with us analysing it from our point of view.

At the beginning, call it month 1, we spend €25 to acquire the new customer thanks to our marketing and communication plan. When we acquire him, we get back €10.

Then, the customer will get back to buy again bringing other €10 and hence raising his value to €20. He will get back, as per our assumptions, other two times to reach the LTV of €40.

Every business has a timeframe, expressed in months, for the customer to go through the process described. This timeframe is the customer useful life.

Along his useful life, at a certain point, the customer LTV has payed back the CAC. And, during the rest of his life, he’s generating valuable contribution margin.

CAC payback period day by day

As business owners we don’t know how the four purchases are distributed along the six months. So, we can imagine that the customer value has a marginal increment each month up to reaching the LTV at the end of his useful life.

Clearly, this is an economical artefact which can’t have any financial proof in the real life. But it’s still a useful artefact to get to our point: understand when CAC has been paid back.

 

As we see, based on the business data assumed, the CAC payback period is 4 months in case of a useful life assumed to be of 6 months.

CAC payback period, simplified

The chart above can be even more simplified to get a clearer view about the payback timeframe.

What we actually need is the CAC payback time, hence the values at which the lines cross the x-axis in the chart above.

 

When you’re evaluating a web business, these values might be fundamental to understand where the business may go with the initial capital.

CAC payback period and contribution margin

The CAC payback period is strictly linked to the contribution margin. The best way to reduce the CAC payback is to have a positive balance between the contribution margin and the CAC.

In fact, if we close the first sale profitably, the CAC has been already paid back.

CAC payback period: the biggest picture ever

Of course, for your business, contribution margin might not be €10, expected recurring sales might not be 4 and the estimated CAC might not be €25.

We have crafted a table for you to determine easily your CAC payback period, based on two of the most relevant data: the ratio contribution margin over CAC and the number of recurring customer purchases.

The useful life of the customer is set to 12 months as usually happens.

 

What is a good CAC payback period?

There’s no actual benchmark value to say whether your business has a good CAC payback period.

Still, you should be aware that the shortest the CAC payback period, the easier for you to bootstrap your business with your own resources.