Do you know how long it takes for a customer to pay back what it cost you to acquire them?
If you are a business owner, you might have noticed that in order to get new customers, you have to spend money on Sales and Marketing first. But do you know how soon you will get your Customer Acquistion Cost (CAC) back? Is it the day she becomes a customer? Is it in a month? A year? Will you ever get the money back?
Knowing answers to these questions is essential to running a successful business. Below we will show you how to find the answers. This information is not really relevant to businesses who make only the initial sale, as that should cover their sales and marketing costs, otherwise they wouldn’t be in business to begin with. But it is very important for companies with monthly subscribers, so if you belong to that category, read on.
You might say. Well, this is very simple, if it costs me $100 to get a new customer, she then pays me $10/month, I start making money after 10 months. Well… not so fast!
Time to Payback CAC
The time to payback customer acquisition cost shows you how long it takes for your company to earn back the CAC it spent acquiring new customers as well as the cost of maintaining them (customer service).
Here is How You Calculate CAC: Divide CAC by your margin-adjusted revenue per month
Margin-Adjusted Revenue per Month: This is where it gets a little trickier than in the example above. Once you acquire a new customer, it still costs you money to take care of her. For example, if you are in the software as a service business (SaaS) you are paying for hosting and customer support, and you need to subtract those costs from your revenue.
Formula: CAC / Margin-Adjusted Revenue = Time to Payback CAC
Let’s Look at an Example:
Margin Adjusted Revenue = $250
CAC = $3,000
Time to Payback CAC = $3,000 / $250 = 12 months
What This Means and Why It Matters
It means that you only start making money 12 months after you acquired a new customer. In industries where your customers pay a monthly or annual fee, you normally want your Payback Time to be under 12 months. The less time it takes to payback your CAC, the sooner you can start making money off of your new customers.
If this article was helpful, check out our free cheat sheet “6 Marketing Metrics Your Boss Actually Cares About” to learn more useful formulas you may need.