The answer to high CAC Payback

The latest SaaS benchmarks have shown us what most of us in the trenches already suspected, CAC Payback periods have gotten worse year-over-year. This is most apparent in companies with $20M+ ARR. 

It also means founders are sweating coming up with a solution for investors, and companies are scrambling like hell to get that number down (especially if funding is at stake). Because of course, the lower your CAC:PB, the more efficient your engine is.

Traditionally there are two ways to solve it:

• Decrease your CAC

• Increase your ACV

But that advice is easier said than done in this market. After all, the golden age of SaaS is long gone. The fact is we’re dealing with some key issues:

• CAC is up and ACVs are down

• Sales Cycles rose by 25% across the entire industry in 2023

• And win rates have taken a hit with two out of three reps failing to meet quota

Simply focussing on CAC and ACV isn’t enough anymore. So if you can’t fix those issues, what are the chances you can actually improve your CAC:PB?

The real answer is you need to ditch your unblended payback number (It’s totally useless - sorry, VCs!). If you want to improve efficiency, you need to start splitting it by motions and segments.

Simpson’s Paradox

Before we get into it, why do I call blended payback metrics useless? It’s because of Simpson’s paradox.

Let’s say you have two kids selling lemonade, Alex and Jamie. At the end of the summer you find out:

• Alex sold 90 cups

• Jamie sold 85 cups

It looks like Alex sold more, so obviously he’s a better salesperson, right? But if we break it down…

On hot days:

• Alex sold 70 cups

• Jamie sold 45 cups

On cold days:

• Alex sold 20 cups

• Jamie sold 40 cups

So who’s a better seller now? Well it depends on the weather.

Simpson’s paradox shows how aggregated trends can reverse when segmenting the data. The same thing happens when we deal with blended CAC Payback.

To really measure your payback inefficiencies, you will need to unblend your payback period and split it by motions and channels. This can get pretty complicated, but here’s a template spreadsheet to get you started.

The bad

Once you have your unblended CAC payback numbers, it’s time to look at the worst performers in your engine and start asking questions.

• Is this high because it’s a new motion/segment and you’re still scaling it?

• Can you make it more efficient?

• Is this in a market that simply costs more (e.g. US, Enterprise, Outbound etc.)?

Now that you have a better picture of what isn’t working and why, you have the option to stay with it (in case you’re still scaling), kill it, or reduce your resources from it.

The good

Next, look at what’s actually working and critique it.

• Why is it doing so well? 

• Did we do the accounting right?

• Is it an overarching trend, or just a one-time blip? 

Are there any low-hanging fruit that we can knock off now to make it more efficient? (Not single metrics like ACV, but improvements across the bowtie associated with this motion or channel)

Once you understand why the motion/channel is doing well, start exploring if you can scale it further. 

Because you already looked at what isn’t working, you can start to shift those poorly invested resources over here. 

Payback as an efficiency metric

And this is the true power of this: by simply understanding which channels/segments/markets are doing well and which ones are not, you can start a process of shifting resources from one to the other. 

This approach is great because there is no magic required, if you do this, it will bring down your aggregate CAC:PB substantially over time. 

And yes, CAC:PB is not the “all-perfect” metric. This calculation ignores COGS or Gross Margin, and it ignores how healthy those customers are that you’re adding (e.g. excludes LTV). 

But while VCs love to load more and more stuff into one number (easier to compare companies while sipping their double-shot espresso in Cape Town while waiting for the wind to pick up so they can go for another round of kiting), it’s actually harmful for operators. There’s simply too many variables impacting one number, making it so much harder to manage. 

There’s still a lot more to say about CAC Payback rates (that I left out for the sake of brevity). Next week on my Substack I’m going to bring you a part 2 on the usual suspects bringing up your payback number across your funnel and what you can do about it. If you want to know more subscribe here.

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