The most important KPI
for your SaaS business
To say there are many KPIs that are used to track and measure success would be an understatement. Many of them are pointless vanity metrics but some truly deliver valuable insights.
While most focus on measuring quantity, like monthly growth rates, the real value comes from those who are quality indicators – the LTV, the LTV to CAC ratio and the most important one – your customer payback period.
And what makes it such a great KPI is the fact, that it’s virtually impossible to achieve a strong performance without running your business effectively and efficiently. If you grow your revenue 20% every month you can do it on top of high customer acquisition costs and churn. But with the CAC payback period, you can’t.
Let’s dive into the details:
Customer acquisition costs
It comes as no surprise that with high CAC a short payback period is off limits. And high customer acquisition costs result from spending big on non-buyers and low profitable customers. Which are the result of a “everybody needs our product” – mindset and super low conversion rates.
High customer acquisition costs are accompanied by high opportunity costs. Because you could have spent your time with highly-valuable customers that convert at much highe rates. But actually it’s not the number itself. What really matters is your CAC efficiency. You can easily spend twice as much when you are acquiring four times larger accounts in return.
Revenue Churn
Not only are high spending on acquiring non-buyers a problem but also how much you spend on acquiring (and servicing) customers who churn. The worst kind of churn is where customers depart before they have repaid your initial investment.
That does not only leave you with a debt but your remaining customers have to cover it. The higher your churn rate becomes the lower the probability that they can because they are closing in on their own natural lifetime.
Customer Service Costs
Delivering continuous customer value is more important for a subscription business than any other. But that does not mean that there is no limit on how much you spend on customer service and success. Like everywhere else, customer service must be evaluated on whether its runs effectively and efficiently.
The cost drivers in customer success are trying to turn bad-fit customers into success stories, high support intensity for customers with low account value and constant firefighting. If you generate negative monthly margins your CAC payback period will be infinite. Worse, with every month you are leaking money.
Pricing
Most SaaS companies spend little to none time and though on their pricing. Which is unfortunate as it’s a vital part of their business model. So they set prices based on what their competitors charge or worse, set random prices with numbers that are crossing their mind.
It’s not rocket science to see that the price has a strong influence on revenues and the CAC payback as a result. A well-thought, mature and constantly reviewed and adapted pricing will significantly shorten your CAC payback period. SaaS companies with long CAC periods are almost always those who don’t care about their business economics.
Expansion Revenue
Net negative revenue churn is often considered the holy grail of SaaS. But the only question should be how much negative it actually is. Growing the account value needs to be a priority for any SaaS company. Because this is how your business model works – it’s powered by expansion and retention.
The problem is that most SaaS companies don’t care enough. They have no definitive processes installed on how to grow and monetize their customers’ value. Unsurprisingly, the fastest growing SaaS companies in the world generate a significant amount of their growth from upselling their existing customers.
Summary
In the end, the CAC payback period displays how fast you can grow and how much money you need for. If it’s short, you can reinvest your money faster and the faster you can spin the growth wheel the faster you will grow. And you can only achieve it with a strong operational performance.
The CAC payback period is also a great KPI for measuring risks. A longer CAC payback period lowers the probability of reaching the break-even point as it comes closer to the customer lifetime. If it even exceeds the customer lifetime, your business has a serious problem.