Months to Recover CAC
What is it? How to calculate it?
Months to Recover CAC
Months to recover CAC is a measure of time that demonstrates how long do you take to recover the amount of money invested on customer acquisitions (CAC). It tells your break even on a specific customer, group of customers or all your customers.
In subscription business you have to spend money upfront to acquire new customers and revenue comes over a period (read more about cashflow and billings here). Once the sum of the profit from a customer overcomes the amount of money invested on acquisition, you have achieved break even and recovered CAC.
Keep in mind that to recover CAC you need to have profit. Imagine you have zero margin: no matter how much revenue you got, you’ll never recover the amount of money invested on customer acquisition. That’s way an important variable to calculate it is gross margin.
How to calculate Months to Recover CAC?
Let’s say you spend $2,000 to acquire a new customer that pays a monthly fee of $200, with a gross margin of $80 (40%).
It would take you 25 months to recover the initial $2,000 invested on acquisition, and depending on your produtct and business conditions, there’s a good chance this customer will churn before that and you’d face a loss. That’s why the sooner you recover CAC, the better it is for your business.
Months to Recover CAC = CAC / Gross Margin
All your customers
For this second example let’s consider you’re calculating it in a general way, for all your customers.
To calculate it properly you need to consider these three variables:
- CAC (Customer Acquisition Cost): the amount of money invested to acquire new customers;
- ARPA (Avg Revenue per Account): the average revenue you have from your customers;
- GM % (Gross margin): the percent of total sales revenue that the company retains after incurring the direct costs associated with producing the goods and services.
Months to Recover CAC = CAC / (ARPA * GM%)
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