CAC Payback Period measures how many months it takes a cohort of customers to produce enough Gross Profit to pay back the sales and marketing expenses it took to acquire those customers.
CAC Payback = S&M Expenses÷(New Sales MRRXGross Margin)
Optionally, CAC Payback can also include Expansion MRR: while it's not necessarily MRR from new customers, for customers with lots of expansion early in their lifecycle (eg high NDR) including expansion is necessary to get a good estimate of CAC Payback.
CAC Payback is the best overall measure of sales efficiency: when you account for a company's gross margin, how many months of MRR are they paying up front to acquire a customer? Hypothetically, a business with high dollar retention could make money with a long CAC payback, but since CAC is predominantly an upfront expense, the long payback would have a strong negative cashflow effect. Alternatively, if CAC Payback is too short, a business might be leaving money on the table: more sales investment would yield more new customers who will quickly pay for themselves. Best in class companies with high retention aim for CAC paybacks between 12 and 18 months.
Good: 18 months
Great: 15 months
Excellent: 12 months