The Adaptive Agency Blog

Do You Understand Payback Period?

by | Jun 12, 2024 | Strategy

You just won a new customer. That’s exciting stuff. The more customers, the better.

Some agents intuitively know that not all revenue is equal. They’ve figured out that there are some sales that never turn a profit.

One way to think about that is “How long does it take me to earn back my costs and start making money on a sale?”

In other words, you want to know your “Payback Period.” Here’s how it works.

Step 1: Calculate Your CAC (Customer Acquisition Cost)

This isn’t too hard. Add up all of your sales and marketing costs for the year*. Say it’s $200K.

Next, figure out how many new customers you acquired. We’ll call it 500.

Then divide: $200K / 500 Customers = $400 per customer.

That’s your Customer Acquisition Cost. This is a super useful number to work with.

*You can also do this for the month or the quarter.


Step 2: Calculate Your Payback Period

Suppose a particular new customer earns you annual commissions of $150 per year.

How long does it take to make back your $400 CAC?

Easy: divide your CAC by your annual commission: $400 / $150 per year = 2.67 years.

You need 32 months to earn back your CAC. Then you start making money.


So it’s obvious that not all sales are equal.

If you believe that you’re in the recurring revenue business (not just the net new sales business), you have 2 objectives:

  1. Reduce your payback period.
  2. Increase your total recurring revenue.

You do that in 2 ways.

First, win more of their business. That will increase your annual commissions, which will pay back your costs faster.

That’s your X axis: dollars.

Second, keep the customer for as many years as possible. (Fortunately your recurring revenue is roughly indexed for inflation, so that’s a win.)

That’s your Y axis: time.

That’s how a business mind approaches it. A sales mind just loves to hear the bell ring.


Keeping customers longer and earning more of their business is a great idea.

Meeting with them when they’re new to onboard them could put you on a path to 10x their Customer Lifetime Value.

Payback Period is a useful metric for realigning your business with that outcome.


Still Here? Here’s A Bonus Step: Figure Out Your ROI

In the example above, you invested $400 to make a sale that generates $150 per year in commissions (recurring revenue for your agency).

  • If you keep the customer for 2 years, profit is -$100. ROI is -$100 / $400 = -25%.
  • If you keep the customer for 5 years, profit is $350. ROI is $350 / $400 = 87.5%.
  • If you keep the customer for 10 years, profit is $1100. ROI is $1100 / $400 = 275%