Payback Period is the time it takes for an investment to recover its initial cost from the cash it generates; in 📝Unit Economics, it is the number of months a customer's gross profit takes to repay the cost of acquiring them.
For a capital investment, payback period equals the initial cost divided by the periodic cash inflow, so a $100,000 project generating $25,000 a year pays back in four years. The measure is simple and favors faster recovery, but it ignores cash flows after the payback point and, in its basic form, the time value of money; the discounted payback period addresses the latter.
Applied to customers, CAC payback equals 📝Customer Acquisition Cost (CAC) divided by the monthly revenue per customer multiplied by 📝Gross Margin. A customer who costs $300 to acquire and generates $50 of gross profit a month pays back in six months. Shorter payback returns growth spending sooner, lowers the capital a company needs, and extends the months measured by 📝The Runway Calculation. Payback complements 📝LTV:CAC: a high ratio with a long payback can still starve a growing company of cash. Faster time to payback, a higher LTV:CAC ratio, and a higher rate of customer acquisition are the three levers that increase the value of a revenue stream, and a customer whose 📝Contribution Margin covers acquisition on the first order pays back immediately.
For a DTC business it's better if CAC is less than the gross profit on the first purchase. A brand is built on repeat purchases, but you're spending too much in a channel if you can't at least break even on the first order.