Every business has a finite reserve of cash. When you want to grow a business that has finite reserves of cash, one of the most important factors to your growth is just how long it takes you to recover the cash which you spend on growth.
If it takes you forever to recoup the cash you spent on acquiring customers last month, you're going to find it hard to grow quickly.
A typical business might need about a year to generate enough revenue to cover the costs of acquiring a customer. A more efficient business might take 6 months, whereas a less efficient business might take 24 months.
How quickly a business is able to recover the costs of acquiring a customer depends on a few things:
- The business' customer acquisition costs (CAC)
All other things equal, the more a business spends on acquiring each customer, the longer it'll take to generate enough revenue to cover the costs of acquiring that customer.
- The business' average revenue per account (ARPU)
The more revenue a business generates from each account, the quicker it'll recover its CAC.
- The business' gross margin
A business that has few operating costs, i.e. a high gross margin, will be able to recover its CAC far more quickly than one with higher operating costs, or a lower gross margin.
When we put all of these factors together, we can calculate a metric known as months to recover CAC.
How do you calculate months to recover CAC?
To calculate how many months it takes us to recover our CAC, we first multiply our average monthly revenue per account by our gross margin, giving us our average monthly profit per account.
We then divide our CAC by this number, to give us the number of months it takes us to generate enough profit to pay back our CAC.
An example calculation
To let this sink in, let's run through a quick example.
Let's say that:
- We run a Saas business that acquires customers for around $200 each.
- We offer two subscriptions, which cost $25 and $75 a month each. Customers we acquire are just as likely to sign up to either.
- We have a 50% gross margin.
We can plug these values into our equation from earlier to work out how many months it takes us to recover our CAC:
Modelling months to recover CAC in Causal
Causal is an interactive modelling tool, which lets you build fully customisable financial models for your SaaS business.
The below is an example of the sort of model you could use to calculate months to recover CAC in Causal. You can adjust the inputs at the top of the model to see how they affect the charts.
If you want to get under the hood, and see exactly how the model works, you can also click Use this template in the top right of the model.