Unit economics
CAC payback period
How many months of a customer's contribution it takes to earn back what they cost to acquire.
Formula
Payback (months) = CAC ÷ (Monthly revenue per customer × Gross margin)
- CAC
- fully loaded acquisition cost
- Monthly revenue per customer
- ARPA for a subscription; AOV × monthly order rate for retail
- Gross margin
- as a fraction
LTV : CAC says whether the customer is worth buying. Payback says whether the company can afford to buy them now. A business can be healthy on the first and insolvent on the second, and the second is what kills it.
Payback is also the number that decides growth rate without financing: a company recycling cash in four months can grow roughly three times faster than the same company at twelve, on identical margins.
- CAC
- AED 400
- Revenue per customer per month
- AED 84
- Gross margin
- 45 %
Payback = 400 ÷ (84 × 0.45) = 10.6 months. Every customer acquired is ten months of financed cost before they contribute anything, which sets how fast the company can grow without borrowing.
Dividing CAC by revenue rather than by contribution shortens the apparent payback by exactly the cost of goods — commonly making a ten-month payback read as five, which is the difference between a business that can self-fund growth and one that cannot.
The ratios a decision is taken on. They inherit every error below them, which is why they are the last thing to trust and the first thing quoted.
Cannot be computed without
- CAC
- Everything spent to acquire customers in a period, divided by the number of customers that spending actually produced.
- Contribution margin
- What is left of a sale after every cost that exists only because the sale happened.
A definition is free. Being answerable for the figure it produces is the part that is bought, and this term is a working part of the engagements below.
- Digital marketing for Dubai and the UAE
- Spend follows contribution margin, not volume.
The definitions are the easy part. Whether the figure on your dashboard was computed this way is a different question, and usually the more expensive one.