CAC payback period metric is not for DTC brands.
In essence, the CAC payback period is the time it takes to recover the costs of acquiring a customer.
So from subsequent purchases, you can start making money (Cha-Ching)
This metric, although relevant for subscription businesses, doesn’t work for ecommerce businesses.
Here’s why
–> Unpredictable LTV
DTC brands, if not on a subscription or don’t have reliable historical subscription data, can’t accurately predict the LTV.
Even if you can predict the LTV safely, if it’s taking you more than 1 purchase to break even, the cash cycles will be severely restricted.
–> Doesn’t consider other variable costs
It might work for software subscription businesses as other variable costs of delivery are minimal if not zero.
In ecommerce, COGs, 3PL partners take up a big chunk of the amount you are making off the customer.
So the payback period might not be considering all the other costs involved.
Although it might be helpful to monitor it for 2 purposes –
To bring back the focus on First Order Profitability.
DTC brands should break even on the first purchase or at least in the first month to grow faster.
Anything longer than that will slow you down considerably until you have access to outside capital.
Secondly, you can work your way to bring it closer.
More cross selling post purchase, better retention program, higher average order value initiatives.
As the CAC payback period is tightly coupled with LTV, it’s important to understand this metric and its limitations.
Again, every metric is not relevant to your business or even your industry.
More data doesn’t always mean a good thing. It also leads to action paralysis.