CAC Payback Period is the number of months it takes to payback the cost of acquiring a new subscriber (CAC), with the average margin-adjusted MRR of a subscriber.
Why is it important?
How can you evaluate the success or failure of your sales and marketing campaigns?
Are they worth the money you’re putting into them?
Or is the payback period so long that you should shift tactics?
There’s only one way to know for sure, and that’s by figuring out how long it takes to effectively pay back your costs with the money earned from the new sales generated by your sales and marketing efforts.
How it is calculated
[CAC Payback Period (months)] = [Total Sales & Marketing cost] / ([MRR this month] – [MRR last month]) x Gross Margin %
The problem with a long 18 months payback period is the large amount of capital that needs to be invested up front AND the slow growth that comes with it.
A CAC of $1.800 a month and a monthly average profit per subscriber of $100, is equal to a payback of 18 months.
At this level it will take 3 long years to reach a positive cashflow, provided that the average lifetime of a subscriber is longer than 36 months.
So the key here is to keep payback time less or around 12 months.
How to Reduce the CAC Payback & Boost Your Profitability
There are a couple of EFFECTIVE options that will reduce your CAC Payback for your subscription business:
- Ideal Client targeted campaigns
- Create a Lead maturity system
Knowing the profile of your Ideal Client (Dream Client) is really IMPORTANT and will make sooo many other things in your subscription business easier.
First off, you will be able, in great detail, to relate how the value of your offering leads to the client achieving their desired outcome. This will convert more of the right Ideal Client prospects and super charge your growth.
Secondly, your customer service and product owner will be servicing the great-fit customers instead of spending alot of time on those that will eventually churn anyway.
Last, your ability to nail your Paid Ads, retargeting and outbound campaigns will be very effective at attracting your Ideal Clients and in the end I will cost you less because more convert to customers.