CAC payback period

In plain words

The CAC payback period is the time until a customer's cumulative margin covers their acquisition cost. For a subscription it is counted in renewals or in months: the first order leaves a loss against CAC, and each renewal earns some of it back.

The quick version divides the loss by one renewal's margin. That assumes every subscriber stays. In reality some leave after each order, so the average subscriber earns less from each successive renewal, and payback comes later. Sometimes it never comes.

Formula

• If everyone stayed: renewals to pay back = (CAC − first-order margin) ÷ renewal margin, rounded up
• With churn: the first renewal at which Σ (renewal margin × share still subscribed) covers the loss

Worked example

A coffee subscriber costs $30.00 to acquire and the first order leaves $26.21 of that to recover. If every subscriber renewed, 3 renewals would cover it, by month 3.

With the renewal curve's churn counted, the engine puts payback at renewal 5, in month 5.

Computed by the margin engine in Offer Suite's own code, in whole cents, from a $40.00 bag of coffee with a $12.00 unit cost.

Payback is not profitability

Payback says when a customer stops owing you money. It does not say how much they go on to earn. Two offers can both pay back in month five, with one earning three times as much by month twelve. Read payback for cash, and lifetime value for return.

Using it

Always compute it with churn. Compare the result with the cash you can afford to have outstanding: a payback of five months means five months of acquisition spend is out at any time. To shorten it, the levers in order of usual effect are the first renewal's rate, the first-order price and the acquisition cost.

In Offer Suite

Offer Suite's payback calculation reports both readings: the renewals that recover the loss if every subscriber renewed, and with the renewal curve's churn, each with the month it lands in. It says when no horizon would do.

Source: Offer Suite's margin engine.