How to calculate Time Payback of Customer Acquisition Cost (CAC) and how to use it.

Do you know to what extent it takes for a client to pay back what it cost you to secure them?

On the off chance that you are an entrepreneur, you may have seen that keeping in mind the end goal to get new clients, you need to burn through cash on Sales and Marketing first. Be that as it may, do you know how soon you will get your Customer Acquistion Cost (CAC) back? 

Is it in a month?

A year?

Will you ever get the money back?

giphy-4.gif

Knowing responses to these inquiries is basic to maintaining an effective business.

If you’re just starting out or you need to overhaul your existing marketing strategy, make sure to familiarize yourself with these 7 important marketing metrics.

{{cta(’70a2e67b-6c6c-4ba6-a342-ed536b93ade6′)}}

Below, we will demonstrate to you best practices to discover the appropriate responses. This data isn’t generally pertinent to organizations who make just the underlying deal, as that should cover their deals and marketing costs, else they wouldn’t be ready to go in the first place. Yet, it is critical for organizations with month to month endorsers, so in the event that you have a place in tha category, read on.

To understand time payback of customer acquisition cost, you would think,this is very simple : if it costs you $100 to get a new customer, then they pay you $10/month, you start making money after 10 months. Easy Peasy?…Well no!

980x.gif


TIME TO PAYBACK CUSTOMER ACQUISITION COST

The time to payback customer acquisition cost shows you how long it takes for your company to earn back the CAC it spent acquiring new customers as well as the cost of maintaining them (customer service).

The Time to Payback of Customer Acquisition Cost metric is best defined as:

A calculation of 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).

The CAC Payback Period is the quantity of months required to pay back the forthright customer acquisition costs in the wake of representing the variable costs to benefit that customer. Basically, CAC Payback Period levels with CAC isolated by the gross edge dollars created by that customer.

 

https://media.licdn.com/mpr/mpr/AAEAAQAAAAAAAA1xAAAAJDg0NDEzOGJmLTQyZmEtNDNkNC04MjE3LTZlMmQ2Mjk0NTAwMw.png

 

HOW TO CALCULATE CUSTOMER ACQUISITION PAYBACK PERIOD

Inputs Required

There are best three inputs required for this formula which makes it an easy calculation and easily understood.

CAC = average customer acquisition cost

MRR = average monthly recurring revenue

ACS = average cost of service

MAR = Margin adjusted revenue (MRR-ACS)

Step 1 – Calculate the CAC (Customer Acquisition Cost)

If you have not calculated CAC previously, the link will provide you a calculator to do so.

CAC Calculator

{{cta(’54b1c5af-a626-463c-9f4a-91c991f9932f’)}}

Step 2 – Calculate the CAC Payback Period

To calculate the payback period, you need:

CAC, MRR, and ACS

 

https://media.licdn.com/mpr/mpr/AAEAAQAAAAAAAA0HAAAAJGJjYTdkODVlLWJlMjctNGM0ZS04ZjZiLTU0YWFmOWVhMTE2ZA.png

 

Here’s a quick example:

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

You can also use the calculator by clicking on the link below:

TIME PAYBACK OF CAC CALCULATOR

{{cta(‘df1e186c-8147-4cbc-9beb-4aa41e4e977c’)}}


WHY TIME TO PAYBACK CUSTOMER ACQUISITION COST 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 specifically vital for groups whose clients pay an annual or monthly routine charge (i.e. club memberships, other subscription based totally services).

These organizations normally want their Time to Payback Customer Acquisition Cost beneath 12 months. In reality, a large majority of businesses are trying to find to earn a benefit from their customers inside the first year.

BEYOND YOUR TIME TO PAYBACK CUSTOMER ACQUISITION COST

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.

In quick, these metrics heavily reflect your ability to supply actual enterprise boom, so use them as frequently as you will another metrics to assist power your overall strategy.

Growth Marketer | Co-founder Amol is a Chief Growth Strategist at upGrowth.ways of lead generation, quick optimization tricks, and easy to implement growth hacks are his specialties. He loves to read book and share his knowledge through trainings in free time.
August 14th , 2018

Leave a Reply

Your email address will not be published. Required fields are marked *

Want to learn how Growth Hacking can boost up your business?

Better your landing page with our Inbound Marketing