What it measures
How many months of gross profit from a new customer it takes to recover what you spent acquiring them. It is a cash question, where lifetime value is a profitability question.
Why it constrains growth rate
If payback is 18 months, every new customer is cash-negative for a year and a half. Doubling acquisition spend doubles the cash hole before it doubles the return. Businesses with long payback periods cannot grow fast without external funding, regardless of how attractive the lifetime value looks.
Calculate it on gross profit, not revenue
Using revenue overstates recovery by the entire cost of serving the customer. Gross profit after hosting, support and delivery is the figure that actually repays the acquisition cost.
Include the full acquisition cost
- Advertising and marketing programme spend.
- Sales salaries and commission.
- Marketing salaries.
- Tooling attributable to acquisition.
Excluding salaries is the most common error and it roughly halves the apparent cost.
Reading it alongside retention
A short payback with poor retention is still a bad business; a longer payback with strong retention can be excellent. Neither number means much alone, which is why both belong in the same report.
TallyWise provides this as part of our SaaS and tech accounting. Book a call to talk through your situation.
