Payback Period

LTV:CAC tells you if unit economics work in theory. Payback tells you if you’ll survive long enough to find out.

The formula

Payback period = Customer acquisition cost ÷ Monthly gross profit per customer

The result is months until you recover what you spent acquiring a customer. Some variants use contribution margin instead of gross profit, or annualise it. The core question is the same: how long until you break even on each customer?

What it measures

Payback captures cash consumption. Every new customer is an investment — you spend money acquiring them, then wait for their payments to recover that investment. The payback period tells you how long you’re underwater.

For healthy B2B SaaS, payback under 12 months is strong. 12-18 months is acceptable. Beyond 18 months starts to strain most businesses unless they have patient capital.

What it hides

The number is an average across all customers. It doesn’t tell you whether your best customers pay back in 6 months while your worst take 30.

More importantly, the calculation assumes the customer stays. A 12-month payback looks fine if customers stick around for 5 years. It’s a disaster if half leave at month 14. The metric doesn’t incorporate retention risk — it assumes you’ll collect the payments needed to break even.

Expansion gets ignored entirely. A customer might pay back their acquisition cost in month 18, then triple their spend over the next three years. The payback period treats month 19 the same whether the customer is growing or churning.

How it relates to LTV:CAC

LTV:CAC and payback measure the same underlying economics from different angles.

LTV:CAC asks: over the customer’s lifetime, how much value do we extract relative to acquisition cost? A 3:1 ratio means you get £3 back for every £1 spent acquiring them. This is the theoretical return on investment.

Payback asks: how long until we recover the acquisition cost? This is the cash reality.

A business can have healthy LTV:CAC (say, 4:1) but brutal payback (say, 24 months). The lifetime economics work, but you’re funding two years of customer acquisition before you see any return. If you’re growing fast, each new cohort adds to the cash drain. The faster you grow, the more cash you consume.

This is why venture-backed SaaS companies burn money despite “great unit economics.” The LTV:CAC looks strong on a spreadsheet; the payback means they’re writing cheques today for revenue they’ll collect in 2027.

Where it breaks down

Blended channels. If you acquire customers through multiple channels with different economics — say, paid ads (expensive, fast) and content marketing (cheap, slow) — the blended payback obscures channel-level decisions. A 14-month blended payback might hide a 6-month content payback and a 24-month paid payback.

Contract timing. Annual upfront payments change the picture entirely. A customer paying £12,000 upfront has a very different payback profile from one paying £1,000 monthly, even if the annual value is identical. Some businesses engineer short payback periods through contract structure rather than genuine efficiency.

Cohort degradation. Early customers are often the best — they found you, they had acute pain, they convert well. As you scale, you move into less motivated segments. The payback period from your first 100 customers may bear no resemblance to the payback on customers 10,000 to 10,100.

The decision it enables

Payback determines how fast you can grow without external capital.

Short payback (under 12 months) means each customer funds the next. You can compound growth from operating cash flow. Customer acquisition becomes self-financing.

Long payback (over 18 months) means growth consumes cash. Every new customer is a bet that requires funding. You need either patient investors or a willingness to grow slowly.

The strategic question changes depending on which situation you’re in. Short payback businesses should push growth hard — the economics support it. Long payback businesses need to either fix the economics or accept that growth requires fuel.

The metric series: Part of a series on metrics that reveal what headline numbers hide.