NOTHING is free. Free always costs you something.

When we talk about acquiring customers, this is especially true. It costs money to fill pipelines. When prospects finally become customers, the reality is you have lost money on them.

It’s the classic "you’ve got to spend money to make money".

The catch for SaaS companies is if a customer doesn’t stay long enough to recover acquisition costs, it can sink the business. 

It’s this period, the Customer Acquisition Cost (CAC) Payback Period, that companies need to keep an eye on to maintain profitability.

Customer Acquisition Cost Payback

Some industry experts view CAC as a form of debt; a balance that you pay back over time. If you think about CAC as debt with the time taken to repay the principal amount (CAC) as interest you have a true measure of opportunity cost.

CAC Payback Period is the number of months required to pay back the upfront CAC after accounting for the expenses to service that customer.  

In Smithers, we calculate CAC Payback using either of the following formulae:

CAC Payback (Months) = CAC / (Avg. Revenue/Account * Gross Margin %)

CAC Payback Period = CAC / (MRR - ACS)

The 2019 Openview SaaS Metrics Survey referenced in earlier posts found that CAC payback periods ranged from two to twenty-one months with the averages by revenue cohort as shown in the table below:

Revenue Cohort Median CAC Payback (range months)

<$1M 5

(2 - 11)

$1 - $2.5M 8

(5 - 11)

$2.5M - $10M 11

(8 - 15)

$10M - $20M 15

(11 - 21)

$20M - $50M 15

(8 - 15)

> $50M 15

(3 - 15)

Source: 2019 Openview SaaS Metrics Survey, N=639

Calculating CAC Payback Period

Continuing with our SaaSly model for March 2020. We will need three inputs

• CAC = Average Customer Acquisition Cost
• MRR = Monthly Recurring Revenue
• ACS = Avg. Cost Of Service 

We have already calculated CAC and MRR for March 2020, but we have yet to calculate ACS. 

ACS can help us better understand pricing effectiveness, gross margins and payback timelines.

At Smithers we calculate ACS using the following inputs which we obtain from the accounting system information provided:

R&D Amortization – the cost of your current release

Technical Support – call center handling inbound customer support questions

R&D Net of Cap – Development expenses excluding software capitalization. Usually, this is the cost of software maintenance and supporting current releases. Not new development.

Account Management – the sales team responsible for taking care of current customers.

Hosting – your hosting and data center costs.

Customer Success

We sum these expenses and annualize them then divide by customer count to arrive at the ACS figure for the current month. It should be clear that ACS is driven down by economies of scale (or should be).

Once you are tracking ACS you can run scaling scenarios such as adding 10, 100, 1,000 customers and better understand the impact of growth on your unit economics.

CAC Payback Example

Back to our SaaSly model. For March 2020 SaaSly’s annualized costs are:

ACS March 2020

R&D Amortization $100,000

Technical Support $75,000

R&D Net of Cap $150,000

Account Management $120,000

Hosting $120,000

Customer Success $480,000

Total ACS $1,045,000

Our total customer count is 5,750

Therefore, SaaSly’s average annual COS is $181.74

Now we are ready to look further at CAC Payback Period

CAC Payback Period = CAC / (MRR - ACS)

CAC Payback Period = $260.72 / ($300.50 - $181.74) = 2.19

SaaSly’s CAC Payback period is well below the benchmark of 15 months. Referring back to the Openview SaaS benchmark research these guys are hitting it out of the park.

Want to read the entire series now?

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Running a SaaS business often feels like you are playing a game of buzzword bingo. MRR. ARR. CAC. CLTV. Lots of acronyms that you need to know, understand and track. Download our Guide To 7 Key SaaS Benchmarks.

Managing a SaaS business in a user-driven world

Building a SaaS business relies on knowing your numbers. We now live in a subscription-based world. It is end-user driven.

You need to listen to your customers by identifying what is of value to them and understanding what they are telling you through their actions (or lack of action) and then act on those insights — in real-time.

If you can build a profitable customer relationship, you will build a successful business. Unlike the enterprise software business, your goal is not a single or small set of transactions but rather building a relationship for life.

You can manually build a spreadsheet-based model but that is complicated, error-prone and takes many hours of executive and staff time to maintain.

With Smithers link to your key systems of record once and have the critical business performance data you need at your fingertips you and your team can access your data anywhere that you work, live or play, 7/24.

Smithers amalgamates your payment data, financial data and marketing analytics into a single cohesive set of models that allows you to visualize your key performance metrics in real-time and set your course.

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