How it's calculated
Customer acquisition cost (CAC) is what you spend on sales and marketing to win one new customer. CAC payback is how many months of that customer's gross margin it takes to earn the money back. Until then, growth consumes cash.
David Skok defines CAC as the sum of all sales and marketing expenses divided by the number of new customers added, and the months to recover CAC as CAC ÷ (average MRR per customer × gross margin %).David Skok, For Entrepreneurs His original rule of thumb was to recover CAC in under 12 months, though he notes longer paybacks can work for enterprise businesses where customers expand over time. Some companies report the metric to investors; ServiceTitan's IPO filing, for example, describes a trailing-four-quarter CAC payback period.SEC (EDGAR)
The formula
- CAC = sales and marketing spend ÷ new customers won
- Monthly margin per customer = ARPA × gross margin
- CAC payback (months) = CAC ÷ monthly margin per customer
Worked example
Spending $50,000 to win 100 customers is a CAC of $500. If each pays $100 a month at an 80% margin, payback takes 6.3 months.
| Line | Value |
|---|---|
| Revenue per customer per month (ARPA) | $100 |
| × gross margin (80%) | $80 |
| Expected lifetime (1 ÷ 2% churn) | 50 |
| Customer lifetime value (LTV) | $4,000 |
| Customer acquisition cost (CAC) | $500 |
| LTV : CAC | 8 |
| CAC payback | 6.25 |
Doubling spend to $100,000 for the same 100 customers stretches payback to 12.5 months.
Assumptions and limitations
- Fully loaded spend. Include salaries, commissions, tools, events and advertising, not just ad spend.
- Same period for spend and customers, or a lag to match your sales cycle.
- Payback ignores churn. Customers who leave before payback lose money; compare payback with the average lifetime (1 ÷ churn), shown in the table.