Metrics How-To: Time to Payback of Customer Acquisition Cost

by Dustin J. Hall

time to payback customer costAlright, if you've been following this series of articles on marketing metrics, than you already know your Customer Acquisition Cost (CAC) along with a couple other goodies.

Basically, you know what you're spending to get new customers which focuses on the "what." As in what your return looks like for those marketing and sales expenses.

This article focuses on the metric that determines the "when." As in "When am I gonna get my money back, sucka!" *insert mob boss voice over*

Your Time to Payback CAC will help you find out more than just what your return looks like, but when that return starts to happen. Much like the other articles in this series, let's look at what Time to Payback CAC is, why it's important and how to find your own.

Prerequisites: Metrics How-To: Customer Acquisition Cost (CAC)

What is Time to Payback CAC?

This metric calculates the amount of time it takes for your business to recoup the money it spent to acquire new customers (or CAC).

More often than not, the time component is tracked by months (hopefully not years).

The metric itself is a simple 2 part equation involving your CAC and your Margin Adjusted Revenue.

We'll dive into what this is in just a bit.

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Why Time to Payback CAC is Important

Like we discussed in the intro to this article, you want to know more than just what your return is...you want to know when that return starts to occur.

This is especially important for companies who's customers pay an annual or monthly recurring fee (i.e. gym memberships, software licensing or other subscription based services). These types of organizations typically want their Time to Payback CAC under 12 months. In fact, a vast majority of businesses seek to earn a profit from their customers within the first year.

How to Determine Your Time to Payback CAC

To calculate your Time to Payback CAC, you must first know what your Customer Acquisition Cost (CAC) is. If you don't know this, see the prerequisites link above. You'll also need to know your Margin Adjusted Revenue; or basically how much your customers pay you each month in terms of your margin.

Once you know these things, you plug them into this simple formula:

CAC ÷ Margin Adjusted Revenue

Here's a quick example:

CAC = $8,500
MAR = $1,000
Time to Payback CAC = $8,500 ÷ $1,000 = 8.5 months

Beyond Your Time to Payback CAC

Like many of the other metrics we've discussed in this series, it's important to remember that this metric is one of many that you can use to determine bottom-line results of your marketing efforts. It's one we use as part of the inbound marketing services we provide our clients.

In short, these metrics heavily reflect your ability to deliver real business growth, so use them as frequently as you would any other metrics to help drive your overall strategy.

Related Articles:
Metrics How-To: Ratio of Customer Lifetime Value to Customer Acquisition Cost (LTV:CAC)
Metrics How-To: Marketing Percentage of Customer Acquisition Cost (M%-CAC)