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CAC Payback

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.

CAC Payback = S&M Expenses÷(New Sales MRRXGross Margin)

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.

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.

Benchmarks

Good: 18 months

Great: 15 months

Excellent: 12 months

Settings: Segments, Date Range, Date Aggregation, Revenue Type, Trailing Period, S&M Offset, Expense Segments

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Stage Conversion Rate

Stage Conversion Rate is the While Pipeline Value sums the total ARR of active opportunities in pipeline, weighted pipeline is weighted based on the current deal stage. Weighted pipeline value is a more accurate estimate of Closed Won ARR based on the current pipeline value.

How do I calculate pipeline?

Let's assume we have the following list of opportunities currently active in our sales process:

‍

Deal Name

Sales Owner

Stage

ARR

ACME Corp. - New Business
Bugs Bunny
Stage 1
$10,000
Bonner Books - Upsell
Bugs Bunny
Stage 2
$25,000
CHOAM - New Business
Daffy Duck
Stage 2
$15,000
Daedalus Research - Upsell
Daffy Duck
Stage 3
$30,000
Bugs Bunny
Electric Enterprise - New Business
Stage 3
$50,000
$20,000
Fabulous Factories - New Business
Daffy Duck
Closed Lost

‍

The total pipeline for these opportunities is $130,000. Additionally, we can also get pipeline totals for our two sales reps: Bugs Bunny ($85,000) and Daffy Duck ($45,000).

Note that Fabulous Factories - New Business is omitted from this sum, as the stage is marked as "Closed Lost".

We can summarize our pipeline by Stage to understand how much ARR is in each step of the sales process. To summarize the Pipeline ARR by Stage, we generate the following ARR table:

Stage 1 Pipeline

Stage 2 Pipeline

Stage 3 Pipeline

Total Pipeline

$10,000
$40,000
$80,000
$130,000

‍

While we have the total pipeline value here, we can apply the weightings to more accurately estimate how much of the pipeline ARR will be Closed Won.

What is probability to close?

Probability to Close is a percentage that estimates how much of the ARR that is in a particular stage of a pipeline is expected to be Closed Won. Typically, Probability to Close will be lower in earlier stages of the sales process and higher in later stages of the sales process.

If we multiply the probability to close by the Pipeline ARR, we'll get the Weighted Pipeline ARR value in each stage.

Stage 1

Stage 2

Stage 3

Pipeline ARR ($)

$10,000

$40,000
$80,000

Probability to Close (%)

25%
40%
65%
$2,500
$16,000
$52,000

Weighted Pipeline ARR ($)

Probability to Close assumptions for each stage assume that deals in different stages have a different chance of being won. Deals in Stage 1 are 25% likely to be won, while deals in Stage 2 are 40% likely to be won, and deals in Stage 3 are 65% likely to be won.

After applying the probability to close to the Pipeline ARR, we now have $2,500 in Stage 1, $16,000 in Stage 2, and $52,000 in stage 3, for a total weighted pipeline value of $70,500. This estimate is closer to the real value we expect to have in Closed Won ARR.