The ONE SaaS metric you should be measuring (and 6 tips to improve it):

Most SaaS companies focus on the LTV: CAC ratio.

This isn't the best metric to look at.

The one metric you should focus on instead?

Payback Period

Payback Period is the amount of time it takes to recoup the cost of acquisition from a new customer.

Your payback period shows how efficient your customer acquisition is.

The shorter the payback period, the quicker you can grow.

Most early stage companies don't have enough data to accurately know their Lifetime Value (LTV).

So they guess.

Companies then end up spending more on customer acquisition (CAC) than they can afford.

That could kill your company.

Payback Period gives you clarity quickly.

How to calculate Payback Period?

Let's say you spent $200 to get a customer. That's your Customer Acquisition Cost (CAC).

Your product costs $50 a month.

Your profit margins are 80%:

$200 / ($50 * 80%)

That means:

Payback period = 5 months.

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When calculating Payback period, separate:

• Payback from all paid channels (Paid)

• Payback from all marketing (Blended i.e. paid + organic+ marketing & sales)

This will mean you can get a picture of payback periods across different channels.

Lenny Rachitsky lays out what is a good payback period.

Generally, 6-12 months is a good payback period for B2C and B2B.

Broadly, anything under 6 months is great.

Your goal is to make your payback period as short as possible.

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Here's 6 ways to reduce your Payback Period:

1) Focus on annual pricing

You want to encourage your users to sign up for annual pricing.

Most companies will offer discounts on annual pricing to incentivise customers to pay yearly vs monthly.

My Fitness Pal offers a large discount (67%) on their annual plans.

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2) Test annual pricing only

Calm defaults to annual pricing.

You pay for a year or don't access the service.

This means they only get long-term users.

And their campaign to acquire that customer was likely profitable from Day 1.

3) Use value-based pricing

Value-based pricing allows you to drive more revenue as customers use your product more.

This increases the value of each customer over time.

The most profitable SaaS companies leverage value based pricing to drive growth.

4) Improve onboarding

Better onboarding = better retention

Focus on creating a great onboarding experience.

That reduces churn and gives you more opportunities to offer new products and increase revenue over time.

5) Offer Valuable Upsells

Upselling is selling a more expensive version of your product or service.

Tinder knows users want to know who they matched with instantly.

So they offer the Tinder Gold upgrade.

This strategy works: They made $1.6 billion last year from upsells.

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6) Cross-sell other products

Cross-selling is where you offer a similar or complementary product or service.

You can offer them additional features or services that make their experience better.

Here Freshdesk offers add ons to their customer service package

Your goal is to make your customer acquisition model as sustainable as possible.

Payback Period is a metric you should definitely be tracking and working to improve.

It gives you a clear picture of the sustainability of your marketing.

TL;DR Payback Period is an key metric for SaaS.

Ways to Reduce Payback Period:

1) Focus on Annual Pricing
2) Test annual pricing only
3) Use value based pricing
4) Improve onboarding
5) Offer Valuable Upsells
6) Cross-sell other Products

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