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Financial Metricsimportant

Payback Period

The time required to recover the cost of acquiring a customer through their revenue.

Formula
Payback Period = CAC ÷ (Monthly Revenue per Customer × Gross Margin)
Example

With $600 CAC and $100/month revenue at 80% margin, payback = $600 ÷ ($100 × 0.80) = 7.5 months.

Good Range

< 12 months for most SaaS businesses

Warning Range

> 18 months indicates capital inefficiency

Complete Definition

Payback period measures how long it takes to earn back what you spent to acquire a customer. It's a critical cash flow metric that affects how fast you can grow.

How to Calculate

Payback Period (months) = CAC ÷ (Monthly ARPA × Gross Margin)

Why Payback Period Matters

Cash Flow Impact

Shorter payback means faster cash recovery, enabling reinvestment in growth without additional funding.

Growth Velocity

Companies with shorter payback periods can grow faster because they recover acquisition costs quickly.

Risk Assessment

Longer payback periods mean more risk - customers might churn before you break even.

Payback Period Benchmarks

- **Excellent**: < 6 months - **Good**: 6-12 months - **Acceptable**: 12-18 months - **Concerning**: 18-24 months - **Problematic**: > 24 months

Improving Payback Period

- Reduce CAC through channel optimization - Increase prices or average contract value - Improve gross margin - Accelerate time to first value - Offer annual prepayment discounts

Used in:Unit Economics AnalysisCash Flow Projections

Related Terms

Customer Acquisition Cost (CAC)
The total cost of acquiring a new customer, including marketing and sales expenses.
Customer Lifetime Value (LTV/CLV)
The total revenue a business can expect from a single customer account throughout their relationship.
Gross Margin
The percentage of revenue remaining after deducting direct costs of goods sold.
Unit Economics
The direct revenues and costs associated with a single unit of your business model.

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