This is the second of six articles on the latest SaaS Benchmarks, providing a global view of benchmarking data with insights from the USA and Europe. This article focuses on both customer acquisition costs and CAC Payback.
CAC Payback has come to the fore as a critical SaaS metric in 2023. It is one of the two most important smart growth metrics that investors use to gauge the sustainability of growth.
If you have never heard of CAC and CAC Payback or just need a refresher, this article will answer these questions:
- What is Customer Acquisition Cost, and what is CAC Payback?
- How are Customer Acquisition Costs and CAC Payback calculated?
- What are the latest benchmarks?
- How do these benchmarks vary by company size?
- Are there differences in the benchmarks between US and European companies?
- And perhaps most importantly, why your investors care about CAC Payback?
You can also view any of the other benchmarks in our series here.
What is CAC?
Customer Acquisition Cost, frequently abbreviate CAC or CCA, is the amount spent to acquire a new customer. CAC Payback is the length of time (in months) for the company to recoup the acquisition cost.
They are two critical and complementary metrics for growth companies as they speak to the pace at which a company can grow and the cash that it will require to meet its growth targets.
The Payback Period is a metric that measures the efficiency of a company’s go-to-market engine. It refers to the time it takes for a business to earn back the expenses incurred in acquiring a customer. Two factors determine the duration – the magnitude of the Customer Acquisition Cost (CAC) and the amount of revenue each customer generates monthly or yearly. To calculate the CAC Payback Period, a company divides its total cost of acquiring customers by the monthly recurring revenue (MRR) per customer. In essence, this KPI indicates how effective a company’s marketing and sales strategies are at generating revenue from new customers.
What costs are included in CAC?
Acquisition cost is the average cost to acquire one new customer.
It includes the following:
- Marketing and advertising
- Business development
- Salaries for the sales and marketing teams
- Sales commission and sales incentive schemes
- Any other costs incurred specifically to acquire new customers
These costs are divided by the number of new customers, resulting in the average cost to acquire a single new customer.
How do you calculate CAC Payback?
To calculate CAC Payback, simply divide CAC by the average Gross Margin per customer. This results in the formula, as shown below. The key is to calculate the CAC per customer as the numerator and the average Gross Margin per customer as the denominator. The result will be the number of months required to recoup acquisition costs.
Our data platform calculates this for you, allowing you to tag all costs which are included in CAC using detailed account level detail in the financial system, in a few simple clicks.
What are the Benchmarks
It can be quite difficult to compare across companies because acquisition costs are related to the revenue per customer. The CAC to acquire a customer which will spend £1M per year is typically much higher than one who spends £500.
For this reason, CAC Payback is used for benchmarking. SaaS companies have the lowest CAC Payback at early stages. It increases as they scale.
This table shows the metric by company size or annual revenue. To read the table, just find the size of your business and read down the column. The number represents the number of months to recoup acquisition costs. Payback periods have remained relatively flat over the past three years.
CAC Payback (months)
How do these benchmarks vary by the size of the target customer?
Our favourite benchmarks are shown in this table: based on your target customer size. These benchmarks are so much more useful because the payback varies materially by client size.
It’s also important to note that it also varies significantly by the size of your customers.
The table below shows data for:
- Very small SMEs, those with less than 20 employees
- SMEs, with between 20 and 100 employees
- Mid size companies with between 101 and 1000 employees
- Enterprise companies with over 1000 employees
So if you are selling to SMEs, with between 20 and 100 employees, you should target a CAC Payback of 7 months. A lower number is even better, with the best performing SaaS companies achieving a 4 month payback.
|Target Customer Type||No. of Employees||Good CAC Payback (50th Percentile)||Great CAC Payback (80th Percentile)|
|VSMB/Prosumer||<20||9 months||2 months|
|SMB||20-100||7 months||4 months|
|Midmarket||101-1,000||14 months||7 months|
|Enterprise||1,000+||14 months||9 months|
Are there differences in CAC and CAC Payback between US and European companies?
European benchmarks show lower CAC Payback for at the early stages (up to $10M or €10Mof revenue). Around $10M or €10M, CAC Payback periods equalise with European and international companies achieving similar levels of performance.
That being said, regardless of the differences in benchmark, according to a report by David Skok, a venture capitalist and entrepreneur, the ideal period should be less than 12 months for a software-as-a-service (SaaS) business. The report also highlights that businesses with lower CAC Payback periods tend to have a higher gross margin, as they recover their CAC more quickly and can invest in acquiring more customers or growing their business.
Does a shorter CAC Payback period affect your valuation?
There are several studies that discuss the relationship between CAC, CAC Payback, and improved company valuation. While it’s difficult to find specific statistics that directly link these metrics to valuation, it’s well-documented that efficiently managing customer acquisition cost and shortening payback periods can lead to better business performance and, consequently, higher valuations.
A study by McKinsey & Company on SaaS companies found that those with a lower ratio of CAC to Customer Lifetime Value (LTV) tend to have higher valuations. The study revealed that top-quartile SaaS companies have an LTV to CAC ratio of more than 5x, while bottom-quartile companies have a ratio below 3x.
What can we expect to see in 2023?
2023 is seeing huge (downward) shifts in valuation.
Big tech companies including Amazon, Tesla and Meta lost more than half of their valuation in 2022.
2023 started slightly better but the recovery is anaemic (<10% improvement). The demise of Silicon Valley Bank is yet another setback.
Virtually all tech companies have announced layoffs, many for the first time in 20 years.
Investors’ mentality has shifted from ‘grow at all costs’ to ‘grow efficiently’, and CAC Payback is a key indicator of efficient growth. USA based venture capitalists have announced that CAC Payback and the Rule of 40 are the most important valuation metrics in 2023.
So what can we expect as the year evolves? Our prediction for 2023 is that CAC Payback will fall compared to 2022. The lowest quartile of SaaS companies will struggle to raise funding; many will fail. The best performing companies will spend judicially and focus on smart growth.
At ScaleXP, we are passionate about using data to understand and improve performance. We have fully automated all SaaS metrics, from CAC Payback to ARR to Rule of 40. By connecting with, and importing data from both your accounting and sales systems, the ScaleXP system creates a single source of truth for your SaaS data.
To read more about how we can automate your SaaS metrics, click here.
ScaleXP provides SaaS companies with a market-leading, fully automated view of all their key metrics, including those most vital to investors in 2023. By connecting with both your accounting data and your CRM platform, our solution empowers you to track benchmarks and measure performance with unparalleled ease.
If you’re ready to take your metrics tracking and benchmarking to new heights, click here to get started with ScaleXP. Alternatively, if you’d like to stay updated with more insightful content like our Benchmark series, sign up for our newsletter here. Enhance your company’s data-driven decision-making and stay at the forefront of the curve with ScaleXP.
Keep on the pulse
by joining the monthly ScaleXP newsletter
If you found this article or any other article on our website helpful, you can join our monthly newsletter where we will be sharing all of our new reports exclusively with you.