In this lesson, we’ve established that you’ll start seeing a lower CAC payback time when you switch from monthly deals to annual deals. Now let’s take a closer look at how that happens.
Scenario 1
Assuming your CAC is $900 for every new customer you acquire, and each customer pays a Monthly Recurring Revenue (MRR) of $100 every month. Your input values are:
CAC: $900
MRR: $100
Payment: Monthly, $100
This is how your payback time looks like:
|
Months |
1 |
2 |
3 |
4 |
5 |
6 |
7 |
8 |
9 |
10 |
11 |
12 |
|
CAC |
- $900 |
|||||||||||
|
Monthly payment |
$100 |
$100 |
$100 |
$100 |
$100 |
$100 |
$100 |
$100 |
$100 |
$100 |
$100 |
$100 |
|
Cash balance |
-$800 |
-$700 |
-$600 |
-$500 |
-$400 |
-$300 |
-$200 |
-$100 |
$0 |
$100 |
$200 |
$300 |
In the first month, your cashflows are still negative by $800 because your customer has only paid back $100 of the $900 you spent on acquiring them. Assuming they don’t churn, it takes 9 months for you to break even. After that, the customer becomes cashflow positive for you.
Therefore, your CAC payback time is 9 months in the above scenario.
How will switching to an annual deal with upfront payment affect your CAC payback time? Let’s take a look in the following scenario.
Scenario 2
We’ll keep all variables in Scenario 1, and switch your customer’s payment to an annual deal. Your input values are:
CAC: $900
MRR: $100
Payment: Annually, $1,200
This is how your payback time looks like:
|
Months |
1 |
2 |
3 |
4 |
5 |
6 |
7 |
8 |
9 |
10 |
11 |
12 |
|
CAC |
- $900 |
|||||||||||
|
Annual payment |
$1,200 |
- |
- |
- |
- |
- |
- |
- |
- |
- |
- |
- |
|
Cash balance |
$300 |
$300 |
$300 |
$300 |
$300 |
$300 |
$300 |
$300 |
$300 |
$300 |
$300 |
$300 |
You’ll receive an annual payment of $1,200 in both scenarios. When calculated from your MRR, the CAC payback time is still 9 months.
The only difference in Scenario 2 is:
The customer paid $1,200 in advance for an annual subscription. With a CAC of $900, it means they covered the full CAC (and more) in the first month itself. Therefore, your cashflows are positive by $300 from the beginning of the customer’s journey.
Your CAC payback time is negative cashflow-wise in this scenario.
It takes 12 months to achieve the same result with a monthly deal. Instead of waiting a year, you can now reinvest this additional cash into further customer acquisition, and achieve that positive spiral!
Key takeaway:
Always aim for a CAC payback time of less than 12 months in any scenario to increase your revenue growth. The more you’re able to push the payback time to under 12 months, the more available cash you have for new customer acquisition. The best way to do so is to motivate your customers to sign up for annual deals. The hockey stick growth effect really isn’t that far away!
Happy Calqulating!
