Payback period
Payback period is how many months it takes for a new customer to return the cash you spent getting them. You take what you spent to get one new customer (CAC, customer acquisition cost) and divide by the profit that customer generates each month. If CAC is $120 and they leave $40 of profit a month, payback is 3 months.
Theodor Lindfors, Founding Marketer ·
Formula
Payback period (months) = CAC / gross profit per customer per month
How to calculate payback period
Let's take a software company as an example. They sell a subscription tool to plumbing companies. Leads come from Google and LinkedIn, and a salesperson closes the deal. A new plumbing company pays $99 a month. After hosting and payment fees, gross profit might be $70 a month. If it cost $600 in ads, tools, and sales time to win that customer, payback is $600 / $70, which is about 8.6 months.
Divide CAC (customer acquisition cost) by the gross profit one customer produces per month. Use gross profit, not revenue. Revenue payback on the $99 monthly fee would look like six months and no bank account would recognize it. For ecommerce, run it on cumulative profit from repeat orders rather than a monthly subscription figure. A shoe workshop's second pair might arrive in month four, not as a neat $70 drip.
Why payback matters more than an LTV ratio
An LTV (customer lifetime value) to CAC (customer acquisition cost) ratio can look excellent while the business runs out of cash. Let's take a software company as an example. They sell a subscription tool to plumbing companies. If a plumber stays three years, lifetime value is large and the ratio looks fine. Payback is a fact about the next few months, and it is the constraint that actually limits how fast you can spend. You cannot reinvest the year-three profit in month two.
If payback is twelve months, every dollar of growth is a dollar you cannot use again this year. That is why finance asks about payback and marketing tends to answer with ROAS (return on ad spend). ROAS on the first invoice does not tell you when the cash comes back.
How to read payback period
Segment payback period. Let's take a software company as an example. They sell a subscription tool to plumbing companies. Google brand search should pay back faster than cold LinkedIn. Enterprise plumbing groups may pay back slower than a one-truck shop. A blended payback hides the segment that is quietly funding the rest.
Watch the direction. Payback stretching month over month means CAC (customer acquisition cost) is rising, margin is falling, or early churn is removing customers before month nine. All three are worth catching before the annual review. Let's take a software company as an example. They sell a subscription tool to plumbing companies. If 20% of new accounts cancel in month two, the real payback is longer than 8.6 months, because the average customer does not stay to pay it off.
Common payback period mistakes
- Using a software company's $99 revenue instead of $70 gross profit and reporting a payback half its real length.
- Excluding salaries and agency fees from CAC (customer acquisition cost) when the CFO (chief financial officer) includes them.
- Assuming steady monthly profit when churn removes customers before payback lands.
Lemonado
How Lemonado helps with payback period
Payback needs acquisition cost from the ad platforms and gross profit from revenue systems. For a software company selling to plumbers that is Google and LinkedIn spend next to Stripe. Lemonado reads both, so the number can be checked monthly rather than rebuilt in a spreadsheet each quarter.