How to Track and Report on CAC Payback Efficiency
For scaling SaaS companies seeking to improve their operational efficiency, having an informative and standard method of tracking CAC Payback is crucial for several reasons. First, it helps benchmark cash efficiency against peer businesses and also against past performance. Second, it identifies which levers will make the biggest difference for growth and scaling. And third, it enables the company to have productive conversations at the board level, to keep everyone aligned on goals and appreciative of progress.
Typically in board meetings and pitches we see a rudimentary tracking of CAC Payback using the traditional calculation (S&M expense) / (net new recurring gross margin). In my experience this analysis is one step too high-level for useful discussion, and makes it hard to achieve all of the objectives listed above.
Instead I recommend breaking these numbers down into their constituents and reporting progress to investors on each metric separately & sequentially. Below I’ve sketched out the template that one of Toba’s strongest-performing SaaS companies uses to do this. You can also click here to download the template in Excel if you want to replicate it.
Rather than assign acquisition, launch, and support costs across the S&M and gross margin metrics as in the traditional analysis, this arrangement contemplates each of them directly (along with MRR). Historical and planned improvements in each component metric are clearly displayed, alongside the cumulative improvement in Payback period.
Note how this company reduced its payback by an impressive 3.2 months in the year between Q2-18 and Q2-19 (rolling-5-quarters historical view is a nice way to show this) and plans a further 2.6 months decrease before the end of the year. Those are very, very significant moves -- a firm with an 11-month payback period is an entirely different caliber of business than one with a 17-month payback. Yet each component metric improved by less than 5% in each successive period.
In the board meeting context, this drives much better & pointed discussion than the traditional analysis. And each metric has a clear owner (implementation team owns launch costs, sales team owns MRR of new clients, etc) who can step in to discuss how they plan to improve it.
As for business planning, also note how the template allows you to derive a basic yet useful sensitivity analysis. Where should you apply your efforts, if you had to choose: In growing MRR by 5% or in driving down launch costs by 5%? The analysis shows that the former action would be roughly 3-4x more impactful than the latter.
It’s important that your efforts here are analyzed and communicated with precision. When you combine fast payback periods with low churn and high expansion (not contemplated here), you have a highly performant, attractive, and capital-efficient business.
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