CAC payback period: formula and calculation

CAC payback period

The CAC payback period is the number of months of gross profit from newly acquired recurring revenue required to recover the sales and marketing cost of acquiring it. It combines acquisition cost, deal size and gross margin into one measure of capital efficiency.

Formula

CAC payback (months) = sales and marketing expense
                       ÷ (new MRR × gross margin %)
new MRR: new business, plus expansion where its cost is in S&M

Worked example

Illustrative figures. One quarter of sales and marketing expense against the new and expansion MRR it produced.

CAC payback = 900,000 ÷ (60,000 × 78%) = 19.2 months

Which revenue

Use new and expansion MRR if sales and marketing expense supports both; use new business MRR alone if expansion is driven by a separately costed account management team. Keep the numerator and the denominator on the same scope.

Lag

Spend precedes the revenue it produces. Companies with long sales cycles often set the prior quarter’s expense against the current quarter’s new MRR.

Gross margin

Using revenue rather than gross profit shortens the period and overstates efficiency. Use subscription gross margin, which excludes services.

What Revnewed provides

Revnewed reports new business, expansion and reactivation MRR every month at constant currency: the revenue side of the calculation.

Sales and marketing expense and gross margin come from the general ledger and are not held in Revnewed.

Common misstatements

Revenue in place of gross profit: Payback is measured in gross profit, not revenue.
Expansion without its cost: Including expansion MRR while excluding account management cost flatters the result.
Mismatched periods: Spend and the revenue it generates rarely fall in the same month.