Payback Period
The number of months it takes to recover your customer acquisition cost from a customer's revenue.
Definition
CAC payback period = CAC / (Monthly Revenue per Customer x Gross Margin %). It measures how long until a customer becomes profitable. For SaaS, a payback period under 12 months is considered healthy. Over 18 months is a warning sign. The shorter the payback period, the faster you can reinvest in growth.
Payback period is different from LTV:CAC ratio. LTV:CAC measures total return; payback period measures time-to-return. A 3:1 LTV:CAC with a 24-month payback is worse than a 3:1 ratio with an 8-month payback because cash is locked up longer.
Why it matters for founders
Payback period determines your cash needs. If it takes 18 months to recoup CAC, you need to fund 18 months of customer acquisition before seeing returns. Short payback periods enable self-funded growth; long ones require significant capital.
Example
A SaaS company spends $600 to acquire a customer who pays $100/month at 80% gross margin. Monthly gross profit = $80. Payback period = $600 / $80 = 7.5 months. After month 8, every dollar of gross profit is return on investment.
How Foundra helps
Foundra's unit economics analysis helps you model payback period before you start spending on acquisition, so you know how much capital you need.
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Related terms
Customer Acquisition Cost (CAC)
The total cost to acquire one new customer.
Lifetime Value (LTV)
The total revenue a customer generates over their entire relationship with your business.
Gross Margin
The percentage of revenue remaining after subtracting the direct costs of delivering your product.
Unit Economics
The revenue and costs associated with a single unit of your business (usually one customer).