CAC Payback Period measures how many months it takes a cohort of customers to produce enough Gross Profit to pay back the sales and marketing expenses it took to acquire those customers.

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Optionally, CAC Payback can also include Expansion MRR: while it's not necessarily MRR from new customers, for customers with lots of expansion early in their lifecycle (eg high NDR), including expansion is necessary to get a good estimate of CAC Payback.

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CAC Payback is the best overall measure of sales efficiency: when you account for a company's gross margin, how many months of MRR are they paying up front to acquire a customer? Hypothetically, a business with high dollar retention could make money with a long CAC payback, but since CAC is predominantly an upfront expense, the long payback would have a strong negative cashflow effect. Alternatively, if CAC Payback is too short, a business might be leaving money on the table: more sales investment would yield more new customers who will quickly pay for themselves. Best in class companies with high retention aim for CAC paybacks between 12 and 18 months.

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