CAC payback

Payback months answer the cash question LTV ducks: how long until cumulative contribution recovers CAC?

Payback (months) = CAC / (monthly ARPA × gross margin)

If the unit is profitable but payback is 30 months, you need a lot of capital to grow. David Skok’s rule of thumb for capital-constrained startups: aim to recover CAC in under about 12 months. Enterprise sales with high ACV often run 18–24 months and fund the gap with venture capital.

The big idea

LTV is the whole movie. Payback is when you get your ticket price back. A $40k LTV with 19-month payback can still starve the company if you are growing fast on monthly billing.

The movie analogy breaks when customers prepay annually. Cash payback can be much shorter than the contribution formula, because the year arrives on day one. Say which clock you mean.

Walking through it

Same customer as the classic sketch: CAC = $15,000, monthly contribution = $800.

Payback = 15,000 / 800 = 18.75 months ≈ 19 months

Cumulative cash, simplified, ignoring tax and payment timing:

You are underwater for a year and a half on each logo. Growing 50% year-over-year on 19-month payback means the S&M line will stay large relative to cash collections unless customers prepay annually.

Real businesses plot cohorts: all customers acquired in January, tracked month by month.

Contribution_t = Revenue_t × GM_t − variable support_t
Cumulative_t   = sum(Contribution_0 … Contribution_t) − CAC

Healthy SaaS: the curve crosses zero, then keeps rising or flattens high. Sick SaaS: crosses zero then drifts down as churn eats the book. Great SaaS: keeps climbing because expansion > churn (NRR > 100%).

A mini cohort: CAC $15k, start ARPA $1,000, GM 80%, 2% monthly logo churn, no expansion, 100 customers. Month 0 is −$1,500,000. Around month 19 the cohort is near breakeven. With 1% month-on-month ARPA expansion among survivors, payback shortens.

If January’s SMB cohort pays back in 8 months and March’s enterprise cohort is still negative at month 18, a blended "19-month payback" hides two businesses.

Common mistakes

• Quoting LTV and skipping payback. Cash dies on payback, not on the 50-month story.
• Blended payback across segments. One cohort is fine; the other is a hole.
• Ignoring annual prepay. Cash and contribution clocks differ.
• A free tier with support COGS that never contributes enough to cross zero.

Check yourself

CAC $15,000, monthly contribution $800. Payback?

About 19 months.

Why can 19-month payback be fatal even with $40k LTV?

You fund a year and a half of hole on every new logo. Fast growth deepens it.

Key takeaways

• Payback = CAC / monthly contribution. The classic case is ~19 months.
• Aim under ~12 months if capital is tight. Enterprise often runs 18–24.
• Prefer cohort contribution curves once you have months of data.
• Segment by channel and ACV. Blended payback hides the sick motion.

Further learning

Next: LTV/CAC.