luvv to helpDiscover the Best Free Online Tools
Topic 4 of 8

CAC And Payback Period

Learn CAC And Payback Period for free with explanations, exercises, and a quick test (for Marketing Analyst).

Published: December 22, 2025 | Updated: December 22, 2025

Table of Contents

Why this matters

CAC (Customer Acquisition Cost) tells you how much you pay to acquire a new customer in a channel. Payback period tells you how fast that cost is recovered with gross profit. Marketing Analysts use these to decide which channels to scale, pause, or optimize.

  • Allocate budget by channel where payback is within target (e.g., under 3 months).
  • Compare campaigns with similar CAC but different margins and retention.
  • Forecast cash needs: slower payback ties up more budget.

Concept explained simply

CAC measures the average cost to get one new paying customer from a channel. Payback period measures how many months it takes for gross profit from that customer to cover the CAC.

  • CAC = Total acquisition costs for the channel / Number of new customers from that channel.
  • Monthly gross profit per customer = Average Order Value Γ— Gross Margin % Γ— Orders per Customer per Month.
  • Payback (months) = CAC / Monthly gross profit per customer. Use contribution margin (after variable costs).
Mental model

Imagine each new customer as a small battery that recharges your marketing spend each month with gross profit. CAC is the initial battery cost. Payback is how many months until the battery has charged enough to equal that cost. Higher margin and more orders per month speed up charging. Higher CAC slows it down.

Key notes and assumptions

  • Include only acquisition costs for the channel: media spend, fees, creative specific to the campaign, referral payouts, sales commissions tied to acquiring new customers.
  • Use gross or contribution margin (revenue minus variable costs like COGS, shipping subsidies, transaction fees, discounts, and returns).
  • For subscription/retention products, a simple payback uses first-month gross profit. A more refined payback can use expected retained gross profit over months.
  • Keep channel definitions clean: do not mix organic with paid unless that is your policy and consistently applied.

Worked examples

Example 1 β€” Basic CAC and payback per channel

Channel A: Spend $50,000 on ads + $10,000 fees. New customers: 1,000. AOV: $40. Margin: 60%. Orders per new customer in first month: 1.2.

  • CAC = (50,000 + 10,000) / 1,000 = $60
  • Monthly gross profit per customer = 40 Γ— 0.6 Γ— 1.2 = $28.8
  • Payback = 60 / 28.8 β‰ˆ 2.08 months

Channel B: Spend $18,000. New customers: 300. AOV: $80. Margin: 55%. Orders/mo: 0.7.

  • CAC = 18,000 / 300 = $60
  • Monthly gross profit per customer = 80 Γ— 0.55 Γ— 0.7 = $30.8
  • Payback = 60 / 30.8 β‰ˆ 1.95 months

Insight: Same CAC, but B pays back faster due to higher margin and AOV.

Example 2 β€” Including variable costs properly

Channel C: Spend $24,000. New customers: 600. AOV: $50. COGS: 40% of revenue. Payment fee: 2%. Shipping subsidy: $2/order. Returns: 5% of revenue.

  • CAC = 24,000 / 600 = $40
  • Per order margin % = 1 βˆ’ (COGS 40% + fee 2% + returns 5%) = 53%
  • Gross profit per order (before shipping subsidy) = 50 Γ— 0.53 = $26.5
  • Minus $2 shipping subsidy = $24.5
  • If 1 order in first month: monthly gross profit per customer = $24.5
  • Payback = 40 / 24.5 β‰ˆ 1.63 months
Example 3 β€” Retention-based payback approximation

Channel D: CAC = $70. Monthly gross profit per active customer = $18. Monthly retention = 85% (churn 15%). Using a 3-month horizon:

  • Month 1 profit = 18
  • Month 2 profit = 18 Γ— 0.85 = 15.3
  • Month 3 profit = 15.3 Γ— 0.85 β‰ˆ 13.01
  • 3-month cumulative = 18 + 15.3 + 13.01 = 46.31
  • Still not at payback; expected payback is later than 3 months.

Do it step-by-step

  1. Collect clean inputs per channel and period: spend, fees, new customers, AOV, orders per new customer, variable cost rates, and returns.
  2. Compute CAC and monthly gross profit per customer using contribution margin.
  3. Calculate payback = CAC / monthly gross profit. For subscription/retention, also model cumulative gross profit over time with retention.
  4. Compare to your target payback threshold (e.g., 1–3 months for cash-efficient growth).
  5. Decide actions: scale, maintain, or fix inputs (CAC down or margin/orders up).

Exercises

Try these before viewing solutions. Use a calculator and round to 2 decimals.

Exercise 1 β€” Two-channel comparison

Channel A: Spend $50,000 + $10,000 fees; 1,000 new customers; AOV $40; margin 60%; orders per new customer in first month 1.2.

Channel B: Spend $18,000; 300 new customers; AOV $80; margin 55%; orders per new customer in first month 0.7.

  • Compute CAC for A and B.
  • Compute monthly gross profit per customer and payback for A and B.
  • Which channel meets a 2-month payback target?
Show solution

CAC A = 60, CAC B = 60. Gross profit/month A = 28.8; payback A β‰ˆ 2.08 months. Gross profit/month B = 30.8; payback B β‰ˆ 1.95 months. Channel B meets a strict 2-month target; A slightly misses.

Exercise 2 β€” Impact of optimization

Current: CAC = $75; monthly retention = 95%; monthly gross profit per active customer = $20.

Plan: Reduce CAC to $65; increase gross profit to $22; retention unchanged at 95%.

  • Simple payback (month-1 basis) before vs after.
  • 3-month cumulative profit per customer before vs after; does either break even by month 3?
Show solution

Simple payback: before = 75/20 = 3.75 months; after = 65/22 β‰ˆ 2.95 months.

3-month cumulative before: 20 + 19 + 18.05 = 57.05 < 75 (no breakeven). After: 22 + 20.9 + 19.855 = 62.755 < 65 (still no). Improvement is meaningful but not a 3-month breakeven.

Self-check checklist

  • [ ] Did you include all acquisition costs (media, fees, creative, commissions) in CAC?
  • [ ] Did you use contribution margin (after variable costs) rather than revenue?
  • [ ] Are you using new customers, not leads or orders, in the CAC denominator?
  • [ ] Is the payback target aligned with cash constraints and business model?

Common mistakes and how to self-check

  • Mistake: Using revenue instead of gross/contribution margin. Fix: Subtract COGS, fees, discounts, returns, and variable shipping.
  • Mistake: Mixing leads and customers. Fix: Ensure the denominator is paying customers attributed to the channel and period.
  • Mistake: Ignoring returns and fraud. Fix: Apply realistic adjustments or historical averages.
  • Mistake: Averaging across channels. Fix: Compute CAC and payback per channel/campaign; then compare.
  • Mistake: Using lifetime value for month-1 payback. Fix: Use first-month or modeled retained gross profit for time-bound payback.
Quick self-audit
  • [ ] My CAC includes agency fees and promo vouchers that triggered acquisition.
  • [ ] My margin includes refund/return allowances.
  • [ ] My payback horizon matches our policy (e.g., under 3 months for scale).
  • [ ] I can reproduce figures from source data in a spreadsheet.

Practical projects

  1. Build a CAC & Payback Tracker (Spreadsheet)
    • Inputs: monthly spend, fees, new customers, AOV, margin %, orders/customer, variable cost rates, returns.
    • Outputs: CAC, gross profit per customer, payback months, 1–6 month cumulative payback with retention.
  2. Sensitivity Model
    • Create sliders/cells for CAC, AOV, margin %, orders/mo, retention.
    • Show which levers shorten payback to your target.
  3. Channel Review Pack
    • For 3 recent campaigns, compute CAC and payback; add commentary and actions (scale/pause/optimize).

Quick Test

Take the quick test to check your understanding. Available to everyone; only logged-in users get saved progress and stats.

Find it below on this page.

Mini challenge

Your growth team requires payback ≀ 3 months and CAC ≀ $70.

  • Channel X: CAC $68; monthly gross profit per customer $21.
  • Channel Y: CAC $55; monthly gross profit per customer $16.
  • Channel Z: CAC $80; monthly gross profit per customer $30.
Reveal guidance

Payback X β‰ˆ 68/21 β‰ˆ 3.24 (fails payback); Y β‰ˆ 55/16 β‰ˆ 3.44 (fails payback); Z β‰ˆ 80/30 β‰ˆ 2.67 (passes payback) but fails CAC cap. None meet both constraints; either relax a constraint or improve inputs.

Who this is for

  • Marketing Analysts comparing channel efficiency.
  • Performance marketers planning budgets.
  • Product and growth analysts needing cash payback visibility.

Prerequisites

  • Comfort with basic arithmetic and percentages.
  • Understanding of gross vs net revenue and variable costs.
  • Ability to attribute new customers by channel and period.

Learning path

  1. Channel attribution basics (sessions, leads, customers).
  2. Contribution margin and unit economics.
  3. CAC and payback period (this lesson).
  4. Retention and cohort analysis to refine payback.
  5. Budget allocation and scenario modeling.

Next steps

  • Automate your CAC & payback tracker on a monthly cadence.
  • Set guardrails: max CAC and max payback by channel.
  • Run a weekly review where underperforming campaigns get a fix-or-pause action.

Practice Exercises

2 exercises to complete

Instructions

Channel A: Spend $50,000 + $10,000 fees; 1,000 new customers; AOV $40; margin 60%; orders per new customer in first month 1.2.

Channel B: Spend $18,000; 300 new customers; AOV $80; margin 55%; orders per new customer in first month 0.7.

  • Compute CAC for A and B.
  • Compute monthly gross profit per customer for A and B.
  • Compute payback for A and B. Which meets a 2-month target?
Expected Output
CAC A = 60; CAC B = 60. A gross profit = 28.8; B gross profit = 30.8. Payback A β‰ˆ 2.08 months; B β‰ˆ 1.95 months. Only B meets a strict 2-month target.

CAC And Payback Period β€” Quick Test

Test your knowledge with 8 questions. Pass with 70% or higher.

8 questions70% to pass
ROAS And MER MetricsReach Frequency And CPM Quality

Have questions about CAC And Payback Period?

AI Assistant

Ask questions about this tool