The Importance Of Payback Period For SaaS Startups
Added by leahfaul 7 years ago in
One of the most powerful levers for SaaS companies to master is payback period. Payback period is the number of months a company requires to payback its cost of customer acquisition. The median SaaS startup has a payback period of 11 months. A short payback period confers two massive advantage to a startups: smaller working capital requirements and a consequent ability to grow much faster. Let’s take a hypothetical example of a SaaS company at $575k in ARR, growing at 15% per month. The company has 25 customers each paying $25,000 and operates with an 80% gross margin. The company bills monthly. The chart above shows the amount of working capital tied up in customer acquisition as a function of payback period. If the company can achieve a 12 month payback period, $7.8M of the company’s cash will be tied up in customer acquisition. On the other hand, if the company achieves a six month payback, only $2.6M of working capital is required to achieve this growth rate, freeing $5.2M for other initiatives. Read more...
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