CAC payback
Sector Deep DivesHow long a customer takes to repay the cost of acquiring them, measured out of gross profit rather than revenue.
Also written: customer acquisition cost payback, CAC
Customer acquisition cost is the sales and marketing spend required to win one customer. Payback is that cost divided by what the customer contributes each year.
The contribution must be gross profit, not revenue, because serving the customer consumes cost of sales. Dividing by revenue understates payback by exactly the gross margin, and it is the most common error in the metric.
Under two years is strong, and beyond three the company is funding growth for a long time before seeing any of it back, which matters enormously when capital is expensive. It is the metric that turned from a footnote into a headline when rates rose.
It also interacts with retention. A three year payback is fine if customers stay for ten years and expand; it is fatal if they churn in four.
Worked example
A customer costs 12,000 to acquire and pays 4,000 a year at an 80% gross margin.
Gross profit per year is 3,200, so payback is 12,000 divided by 3,200, which is 3.75 years. Dividing by revenue instead gives 3.0 years and overstates how good the model is.