CAC and CAC payback
A quarter of Northwind Care's acquisition plan: CAC, the gross profit each customer earns back, and the flattering version to avoid.
A quarter's plan spends $18,000 on sales and marketing to win 30 customers at $150 a month. CAC is $600. Each customer contributes $90 of gross profit a month at a 60% margin, so payback is 6.7 months. On revenue, ignoring the technicians' time and parts, it would be 4.0 months. That's the flattering version, and the one to avoid.
On gross profit
- Good at
Counts only what's left to repay acquisition
- Watch for
Longer, so it looks worse
- Best for
- Any plan with real delivery costs, which is every plan
On revenue
- Good at
Shorter, and easy to compute
- Watch for
Overstates how fast acquisition pays back by the cost of serving the customer
- Best for
- Nothing, unless labeled and shown beside the other
Where this lesson's rules come from
The sources behind this lesson's requirements, by kind. Background reading explains; it is never the authority for a rule. Anything marked as a convention is ours, not the rule-maker's.
- Background reading — not an authority
- Wikipedia, “Customer acquisition cost” (opens in a new tab)Customer acquisition cost — backgroundFree to read
The words this page teaches
Each links to its glossary definition, which also names the authority behind it and the components that render it.
- CACCAC is a unit-economics metric, calculated as Sales & marketing spend ÷ new customers.Convention
- CAC paybackCAC payback is a unit-economics metric, calculated as CAC ÷ (Monthly ARPA × Gross margin), in months.Convention
- Gross marginGross margin is a profitability metric, calculated as (Revenue − COGS) ÷ Revenue.Convention
- LTVLTV is a unit-economics metric, calculated as (ARPA × Gross margin) ÷ Revenue churn rate, both in the same period unit.Convention
See also
- CAC calculatorCAC is a unit-economics metric, calculated as Sales & marketing spend ÷ new customers.
- Customer lifetime value calculatorLTV is a unit-economics metric, calculated as (ARPA × Gross margin) ÷ Revenue churn rate, both in the same period unit.
- LTV to CAC calculatorLTV:CAC is a unit-economics metric. It has no single agreed formula — state the inputs.
- Magic number calculatorMagic number is a unit-economics metric, calculated as Net new ARR in the quarter ÷ prior-quarter S&M (equivalently (Δ quarterly revenue × 4) ÷ prior-quarter S&M).
- CAC paybackHow many months of gross profit from a new customer it takes to earn back what you spent to win them. It's a metric with no single standard formula.