CAC Payback Period

Live from Schenectady, New York, it's SaaS Talk with the Metrics Brothers, Growth and CAC.

I'm Growth, better known as Ray Reich, the founder and CEO of Benchmarkit.

And I'm CAC, better known as Dave Kellogg, independent consultant, EIR at Balderton Capital, and the author of Kelblog.

And together we are the Metrics Brothers.

And an unlikely pair at that. Today's episode is the 6th in our recently launched podcast, SaaS Talk. In the last episode, we talked about the CAC ratio. Is that right, Ray?

Well, we talked about CAC and CAC ratio, but it was the advanced version of it, Dave.

That's right. I knew something sounded wrong. It's— 2 episodes ago was CAC and CAC ratio. Last episode was kind of advanced topics and interpretation in CAC and CAC ratio, which inevitably led us today to the son of CAC ratio, CAC payback period.

And I know it is your favorite customer acquisition cost efficiency metric, but maybe we should talk about that a little bit later.

We're going to get to that certainly by part 2. We're going to talk about all the things I don't like about it. But let's agree in part 1 to talk about what it is first.

The Metrics Brothers is proudly sponsored by Benchmarkit, the B2B AI and software industry's largest, broadest, and most contextualized benchmarking index. Dave Kellogg and Ray Groth Wright have put the Metrics Brothers podcast on hiatus for remainder of 2026. All episodes we have ever recorded are still available on your favorite podcasting app. You can reach Dave at Kellogg and Ray on LinkedIn at Ray Reich. Thank you so much for listening to the Metrics Brothers podcast. Okay, well, I use a pretty simple calculation, and it's the one that the SaaS Metrics Standards Board uses, and I'll, I'll lean on that quite often, Dave, since I put so much time into that. But it basically takes your customer acquisition cost, which is your fully loaded sales and marketing expenses, and you divide it by the average contracted ARR per new customer multiplied by gross margin You take the result of that, multiply it by 12, and it gives you CAC payback period in a number of months. That is the calculation formula that I use.

And Ray, how about you?

You use the same one?

Actually, no, Ray, I use a shortcut for that. Look, I frankly don't look at CAC by itself a lot. I look at CAC ratio all the time. So CAC ratio is the number that's kind of at the tip of my fingers. So I start with CAC ratio and just divide it by gross margin. And multiply by 12 to get CPP. So as an example, if your CAC ratio is 1.5, so it costs you $1.50 to buy or to get $1 of new ARR and your gross margin is 75%, I take 1.5 divided by 0.75, I get 2, multiply that times 12 and get a 24-month CAC payback period.

Well, that's not a very good CAC payback period, but maybe we don't want to talk about benchmarks yet, but that seems very long, Dave.

Depends on the segment, but the math was easy. You try to get one that results in 1.65 in your head.

Well, let's, let's talk about— it's easy to calculate. We gave 2 different versions of it, but why, why do we even calculate the CAC payback period? I'm, I'm going to let you talk about this first. What's the value of CAC payback period from your experience?

So look, I think CAC payback period is a top, I don't know, top 3, top 5. We should probably make a ranking, but it's a top, top SaaS metric. metric that venture capitalists use to evaluate companies. So they're going to look for it. And we can talk about benchmarks in a minute. You're the benchmarking guy, but just, I like simple math. Less than 12 months is amazing. Less than 18 is good. Less than 24 is, well, probably less than 18 is very good. Less than 24 is good. And greater than 24 starts to raise eyebrows. That's the way I think of it. Because I don't have all the benchmark data at my fingertips like you do. So, and they look at it and they kind of filter companies. Like they say, oh, less than 12 months CAC payback period. That's awesome. So they use it and we'll talk about whether this is right or wrong in a minute as an efficiency metric. They go, ooh, what an efficient go-to-market CAC payback of 10 months. But it's a top screening metric for investments. And a lot of people look at it and don't even look at the CAC ratio or CAC itself anymore. They just go straight to CAC payback.

I think it's a little dangerous. And let me tell you my experience with CAC payback period. Number one, I do see fairly inconsistent calculation of CAC payback period. Even though it's pretty basic. And the biggest mistake I see companies make is they don't gross margin adjust it. So that's the first thing that I think it's really important that even when the investor says, well, it should be 12 months or better, I always ask, do you gross margin adjust your calculation or is it without gross margin? Do you think it's a relevant concern?

Yeah, absolutely. Well, for most companies it'll change it by 20% roughly, right? Maybe more depending on how the gross margin, subscription gross margin looks. And by the way, I do subscription gross margin it. I don't blended gross margin it because a lot of SaaS companies will track both. They'll track services gross margin and subscription gross margin and therefore get a blended gross margin. And if you're one of those companies, I use subscription gross margin. I'm not sure which— sounds like you use blended, but putting that issue aside.

That's right.

It's critical because it'll change the value by a lot. I would say typically 20%, maybe even 40%. So yes, it matters. And the way I remember to include it is It is, look, it's a payback metric. And you could argue you're getting paid in revenue, right? You're getting paid back in revenue. But the other argument, which I find compelling, is you're getting paid back in subscription gross profit, right? You're getting paid back in revenue after basically profit after the direct cost of delivering that revenue. So yes, I do it on a gross margin basis. I use subscription gross margin. And I do that because it's a metric that's measuring payback. And therefore, I think it's just more relevant to use subscription gross profit than subscription revenue.

Those are 2 great takeaways. Number one, always do it on the subscription gross margin. Very, very important. I have another one, Dave. And that is, you mentioned, hey, less than 12, very, very good. You know, 13 to 18, good. 19 to 24, not so bad. And anything above that, it depends. The most important variable that I think a company needs to look at is what's their annual contract value. Because if you have a fast-moving 30-day $1K product, you may need to be in the 3 to 6 months CAC payback period to be at median. But if you have a $100K enterprise product, you might be willing to accept 24, even 36 months. And I see so many people just saying it's 12 to 24 months. Without that context. What say you about that?

Yeah, just like last episode, we discussed how CAC ratio really should be seen as a function of growth. You're saying CAC payback period should be a function of— I want to call it velocity or maybe deal size, right? Because normally smaller deals are higher velocity. And I agree with you, by the way, because as you know, I live in an enterprise B2B SaaS world. And most of the work I do with people, minimum $20K deals and up. And sometimes, you know, $200K deals, $500K deals, million-dollar deals. So I'm fairly enterprisey. I mean, I have a couple customers who do do $5K deals annual, but my world is largely enterprise biased. So that's where my numbers come from. And you're right, the further down you go, the shorter it needs to be.

And then I got into a LinkedIn debate. Believe it or not, there's LinkedIn debates about how to calculate SaaS metrics. But this person responded to a post I did on CAC payback period and say, wow, I have a 4-month payback period, so we must be a phenomenal company. So I asked her what her ACV was and she goes, $18,000. So Dave, I'm like, 4 months, $18K, something doesn't feel right. So I asked her how large the company was. So it's about an $800,000 ARR company with founder-led sales. So there was no really sales cost loaded into that, right? So I'm like, that's one of the dangers of CAC payback. Oh, by the way, she didn't gross margin adjust it either. So to me, that's one of the dangers of CAC payback period is really understanding how it's calculated and make sure you validate that not only with your executive team, but with your investors.

Look, all SaaS metrics, GTM SaaS metrics, go-to-market SaaS metrics are about trying to measure the efficiency of a model. And if you're still in founder-led sales and have $800K in ARR, you arguably don't have a model, right? You have a founder out there selling stuff, and that's fantastic. But the meaning of, I would say, all GTM metrics is suspect because what you're trying to say is, do you have a sales model? Oh yeah, we do. We have 3 reps for every 2 SEs, for every 2 SDRs, for every, you know, and we have 6 managers per rep and 1 sales ops person per 15 reps and 1 enablement person per 40 reps. Whatever it is, one partner's person per 15 reps, right? You have all these ratios in a model. And then we say, when we run that model, how efficient is it? So that's the intent of all this stuff. And yes, people like to calculate them when companies are small, but the smaller you get, the less you're actually measuring a model. And either you're doing an allocation of the CEO's time, which I also think is kind of BS, or you're excluding the CEO's time, which is also kind of BS. So, I mean, to me, yeah, there's a kind of a lower bound on when we should calculate this stuff. Certainly before we get excited and go, I'm only 4 months, because you don't have a model that's every 4 months. You do not have a scalable model that can preserve that.

And going back to something you said like 3 episodes, you know, hey, it all depends on the context. Does the dog hunt? Well, if the dog hunts and now you're really trying to make it repeatable and scalable, then you're going to layer sales and marketing costs. You're going to have a more normalized payback period. But, you know, I have to maybe show my Dave Kellogg fan club membership card right now because one of the favorite speeches I've ever seen you do was at SaaSmetricspalooza last year. And the title of the session was, You Can't Fix a CAC Payback Period. I'm like, why in the hell do you measure it if you can't fix it? Can you kind of dive into that a little bit, Dave?

Yeah, thanks, Ray. Thanks for remembering that. So I picked that title because, look, it is a very visible metric. So you need to understand and calculate CAC payback period. There's zero question in my mind if you're an entrepreneur trying to raise money. But you can't— I always say you need to calculate it because VCs are going to ask you about it, but you can't really fix it. And it's a little bit tongue-in-cheek. What do I mean by that? If you tell me your CAC payback period is 36 months, well, if I'm an investor, it's easy. It's like, hey, so nice to meet you. Let's stay in touch, right? Like an investor knows what to do with a 36-month CAC payback period. An operator or a consultant, not so much. I have to ask a bunch of other questions, right? And this is back to this notion I talk about of compound versus atomic metric. Right. Investors love compound metrics because they're screening, right? These— I think people forget how much VCs screen. They will typically look at 100 deals for every deal they invest in, right? Like most of their time is spent screening. So they need good screening metrics. And this is a great screening metric. If your CAC payment period is 36 months, I probably don't want to talk to you. And it doesn't really matter why. I don't care if you have bad subscription margins or inefficient sales or lousy marketing, right? I don't care. Because it's not a good investment because your sales model dog don't hunt, right? As you were saying. So that's why I use the title, because operators in my mind prefer compound metrics. Somebody's gonna have to ask 3 questions. If your CAC payback period is 36 months, I'm gonna say, well, I'm gonna say, what's your CAC ratio? What's your subscription gross margin? I'm gonna start there. Then I'm gonna decompose the CAC and start looking at sales metrics, right? So it can serve as a smoke detector operationally. Like beep, beep, beep, something's wrong in this room. But it doesn't tell you what to fix. It doesn't tell you where the fire is.

And that's actually why I do love it, because I started doing all this conversation about metrics, right? To use metrics as an alignment mechanism between marketing, sales, and customer success. And CAC payback period actually does a great job of that, because if you really understand the input variables or the leading indicators that drive that outcome, kind of lagging metric. It's things like, what is your win rate in the opportunity funnel? What is your average ACV? What is your velocity, your sales cycle length? But then you can go to marketing and look at things like, what's my funnel conversion rate from MQL to stage 1, stage 2? What's your cost per lead? And then you can look over at the product team and say, okay, what's my gross profit? What is my cost of goods sold? And if we all understand how our departmental performance metrics impact CAC payback period. It's a grounding mechanism. What do you think about that as a kind of the way I wrap it?

Yeah, I think it's a fine framework. I think you express it differently than me, but I think it's a fine framework. Basically, it's kind of a result metric is another way of saying it. And the more if everyone understands how their inputs affect the result, and they understand how important it is, right, because it is a key determinant of whether or not you're going to raise money. And if you can map out for people what they can do in their little part of the world, right, to make that result better, Hey, if we could shorten the sales cycle by this much, we could drive up our quarterly production by this much, which would improve our CAC ratio by this much, which would improve our CAC payback period by that much. Yeah, it's a good thing. I think people like to know, you know, what's the old, you know, one guy thinks he's laying bricks and the other guy thinks he's building a cathedral, right? So people like to be cathedral builders.

Exactly. So I don't know how much more we can dig into CAC payback period. Anything else you want to highlight here today?

Yeah, well, if we can move on to what I consider part 2 of the episode, let's talk about what's wrong with it. So I've got 4 things, Ray, that we can talk about in whatever order you want. But one, is it an efficiency metric or a risk metric? 2, well, I'd like to review capital budgeting to answer that question. 3, I'll call it the modulo 12 factor. And 4, just the impact of churn, which is more of a nit. But, but yeah, I'd love to go into those topics.

Well, I need to dig down onto the churn one, right? Because churn in and of itself doesn't go into the calculation. But viewing CAC payback period in isolation of churn, and that's customer lifetime value, can be a meaningless metric. So maybe this is more about don't ever be a slave to a single metric. You need to look at it as almost an interrelated organism.

So agree with your point. My point was slightly different, and it's slightly really more corner casey, so that your point's more valuable. But if you end up with a 48-month CAC payback period, Just so you have a— the longer number you result in, the more likely it's actually longer than that because the customer will have churned before they can actually give you the payback. And that's not included at all, right? Just say you have an exceptionally high churn rate, right? And say your notional CAC payback period is 24 months, but you churn everybody at 12 months. Well, your CAC payback's infinity because you never actually get the money back. So that's what I mean by it doesn't include churn. It's not supposed to include churn. If you understand the metric and I say that, you'll be confused like you were. You're like, This is not a churn metric. And I'm like, yeah, it's not. But we are saying we're gonna get our money back in year 3. And if they've already churned by year 1, no, we're not.

So do you have like the house of— you said the top 3 earlier. So you said CAC payback period, and maybe CAC ratios in the top 3. Would you put gross revenue retention in that? Because to me, that's interrelated to what is your customer lifetime value, which is critical.

I want to make sure we have time to attack CAC payback period. But if I were to do my top 3, it would be— I mean, it's going to be how big is this thing, how fast it's growing. So burn too. What's your ARR base? How fast is the ARR growing? I would then say, how much does it cost to add a dollar? I think most VCs would probably go, what's your CAC payback period? How long does it take to get your money back? I would say, what's your CAC ratio? How much does it cost to pour money in? And I would say NRR or GRR. I'd probably say NRR. What happens to money once it's in the bucket? And if I had to just pick top 5 off the top of my head, that's what I'd do.

Okay, let's cycle back to your favorite topic, and that is why CAC payback period is not your favorite efficiency metric.

Yay, you finally let me talk about it. So I don't think it is an efficiency metric, uh, first. So I think this is— I call it the most misunderstood SaaS metric, and I think people think it's an efficiency metric, but it's not. It's a risk metric. And what does that mean? I mean, just go back to business school. We were taught in the finance class and the capital budgeting section about IRR and NPV. We were probably also talking about payback periods in that class. And that class would define a payback period as the amount of time it takes to get your money back. And you use it in capital budgeting if we're evaluating Project A versus Project B and they have the same IRR and one has a payback period of 6 months, the other one's a payback period of 12. then A is a superior investment, right? Ceteris paribus, the project with the lower, the faster payback period wins, right? And conversely, if they both have the same payback period, but one has a much higher IRR, then the IRR wins because the payback is neutral. So it's a risk metric. It's measured in months. It's how many months does it take to get my money back? That's what payback metrics are. They are not efficiency metrics. Efficiency metrics are not typically measured in months, and they're more like, you know, productivity per salesperson, right? Or productivity per dollar of sales and marketing investment. Those are efficiency metrics.

But Dave, you take one efficiency metric, CAC ratio, you divide it by another efficiency metric, gross margin, and you get—

And it cancels out.

Period. Oh, it cancels out. You know, I understand mathematically and You know, as a purist, you're right. But don't you think the majority of people out there view CAC payback period as one of those customer acquisition cost efficiency metrics? Isn't that the way most people think about it?

Yeah, I agree with that. Now, I think most people are wrong. But, but yes, most people think of it as an efficiency metric. You should be aware of that. You probably should not get into this particular debate with an investor. I do not recommend it. It's a good way to not get the investment. But, but just Honest truth, it's, it's a payback period metric. Payback period metrics are risk metrics where risk is defined as how long it takes to get your money back off the table, period. It's cut and dry. So it's not the way most people look at it. So if you feel confused, how about this? If you feel confused, you should listen to what I'm saying and you say, ah, Dave's right, and then do what Ray is saying, which is forget it.

Well, I'm going to pull my ripcord here. It's my safety mechanism, which is our 20 minutes are almost up. But I know—

I got one more though, right before you do that. You got to cover— I got the modulo 12 factor. This is the last one, which is just say you like it as a risk metric and you think it's a great payback metric. I'm then going to say it's kind of fake metric anyway, because you only get paid in SaaS every 12 months. So if you say your CAC payback period is 18 months, no, it's not. It's 24, right? If you say it's 9 months, it's actually— no, it's not. Well, actually, it's the other way around because you get payments in advance. If you say it's 9 months, it's actually 1 day, right? You're actually—

you're DSO.

If you say it's 18 months, it's actually 366 days, right? So if you actually care about payback, if you're, if you're trying to do cash flow modeling, right, and understand how long the cash is out there, you have to factor this in as well. So I get that it's a super popular metric. I get everyone uses it as an efficiency metric. But if you're having trouble sleeping at night and things don't make sense, you're right. Because it's measured in months, it's actually about payback. And you don't actually get paid every month in SaaS, you get paid every year. So the end of my top 2 rants on that topic.

Well, I think that's the perfect time to have a word from our sponsor Maxio because they help you calculate CAC payback period. Okay, Dave, so here we are. We got to wrap up today's discussion on CAC payback period. Any final things you want to leave with the audience? And then I'll do a little summary.

Yeah, I mean, my summary is just, it's a very important metric. Everyone looks at it. You should work hard to keep yours, you know, to benchmark it and try and come up with a good number. You should try and have a story of how it ties to your other metrics, right? Like maybe you have a slightly longer CAC payback period, but you have great NRR and you have really low churn. Okay, well, that's compelling, right? So, so I think those are my top 3 points. So back to you for your summary, Ray.

Well, I think the most important thing is please make sure when you're calculating CAC payback period, always gross margin adjust it. And to your point, the second thing is, and when you talk about here's how good we are based upon CAC payback period, really do understand the benchmarks for companies like yours based upon ACV and even distribution model. I think those are the 2 most important things. And number 3, be prepared to know what the trends are, especially if you sell to multiple markets, because not all CAC payback period is the same. For the enterprise market, it's going to be very different than for your SMB or mid-market. So always calculate CAC payback period as you scale on a segment-by-segment basis. That'd be the last thing I'd leave the audience with, Dave.

Super.

Okay. Well, thank you, Cap, for joining me again today.

Thanks, Growth. It's been a pleasure. What's the next episode about?

Well, I think we actually need to pivot back to something we talked about, about CAC and CAC ratio, which goes into the CAC payback period. And that's, how does product-led growth in free trials and freemiums impact all these CAC calculations, CAC ratio and CAC payback period? I think it's a pretty good one.

Yes, it is quite juicy.

Well, to our listening audience, boy, we just appreciate you listening to Dave and I kind of riff back and forth with each other. And if you're finding value from our conversation, please go ahead and subscribe to SaaS Talk with the Metrics Brothers on your favorite podcast app. Go ahead and give us that 5-star rating because that amplifies the distribution and gives more people in the industry the chance to listen to us. CAC, see you next week.

See you, Growth.

Bye-bye now.

The Metrics Brothers AI, SaaS, and More is a production of the Metrics Brothers Growth and CAC and a member of the Benchmarkit Podcast Network. By accessing this podcast, you acknowledge that the Metrics Brothers make no warranty, guarantee, or representation as to the accuracy or sufficiency of the information provided or the humor content of the jokes told. Ray, information, opinions, and recommendations presented are, according to our spouses, probably wrong and provided for information purposes only. This podcast should not be considered professional, or for that matter, unprofessional advice. We disclaim any and all liability for any direct, indirect, indirect, misdirect, incidental, special, ordinary, consequential, inconsequential, or other damages arising out of any use of, or God help you relies upon the information presented here. Ray Grothreich is based in New York City and available on X @RayReich. Dave Kellogg is based in Silicon Valley and available on X @Kellogg. Schedectady, which is French for unspellable, is not our actual production location. Thanks for listening.