What is Payback Period?
Definition
The number of months it takes for a subscription business to recover its customer acquisition cost from a subscriber's payments.
Understanding Payback Period
Payback period = Customer Acquisition Cost / Monthly Revenue per Customer. If it costs $120 to acquire a customer who pays $20/month, the payback period is 6 months. Shorter payback periods are better — the business recovers its investment faster and can reinvest in growth.
Healthy SaaS companies target payback periods under 12 months. For consumers, payback period explains why some services offer aggressive discounts for the first few months — they are willing to accept a longer payback in exchange for winning your business. Lock-in mechanics ensure you stay long enough for them to recoup acquisition costs.
Related Terms
Customer Acquisition Cost
The total cost of sales and marketing efforts required to acquire a new paying subscriber, calculated as total acquisition spend divided by new customers gained.
Lifetime Value
The total revenue a business expects to earn from a single customer account over the entire duration of their subscription relationship.
MRR
Monthly Recurring Revenue — the predictable total revenue a subscription business expects to earn each month from all active subscriptions.
Unit Economics
The direct revenues and costs associated with a single subscriber, used to determine the profitability of each customer.