In SaaS, customer payback is key in managing your cash burn rate, runway and GTM strategy. In this article, I am taking a different view of customer acquisition payback by highlighting the rate at which customers pay for the product services. This billing frequency rate is commonly setup as monthly, quarterly, semi annual, or annual. The billing frequency is the customer cash flow payback to the business, which impacts the speed at which the company can grow. For example, if your customers make monthly payments, then it would take at least 12 months to pay back the initial investment for the annual contract value (ACV). For the monthly billing mechanism, you’ll need significant capital to pay for other operating expenses to run the business during the first year because your initial investment capital is tied up for 12 months, until the customer makes whole the ACV. David Skok explains this SaaS cash flow trough in this article highlighting the cash timing issues where customers payback the upfront investment overtime.
Billing types and payback impact
Below, depicts the cash flow payback period for a single customer on monthly vs quarterly vs semi annual vs annual billings. The initial customer acquisition cost in each chart is invested in period 1. The following periods shows the net result of the CAC investment subsequent to the customer repayments. The bars in the graph indicate how quickly the CAC investment is paid back to the business to generate positive cash flows. For example, the CAC investment is fully recovered in after month 12 from monthly payments, month 10 from quarterly payments, month 7 from semi annual payments, and month 1 from annual payments. The difference between monthly and annual payments is drastic. The time to recoup the CAC investment for monthly payments is one year where as for annual payments is in month 1. The lag time in customer payback is duration of the company’s capital that cannot be further invested back into the company to fuel growth.
Cash is Startup life or death
To further highlight the importance of annual upfront payments, consider the following early stage startup scenario below. The startup raises $1M of seed money, and generates 1 customer each month for $2K MRR over the course of the first year of operating. The gross burn is $100K per month. In the chart below, shows the cash position scenarios each month for monthly vs quarterly vs semi annual vs annual customer payments. For each payment type, only the annual payment scenario results with a positive cash balance. Even if you discount the MRR by 10 percent, which is common to motivate a customer to pay annual upfront, the positive cash balance remains. In this hypothetical scenario, the difference between annual and non annual payments can be startup life or death.
More upfront payments not only help with cash burn and liquidity, but also growth. The quicker you recoup the customer acquisition cost, allows the business to reinvest quicker into acquiring more customers and grow revenue. Customers are essentially generating free cashflows to grow the business.
There is a lot of material around customer acquisition cost and payback, but I wanted to highlight how customer payments can affect cash flow and growth through quicker cash payback, which allows the company to pour more capital back into the sales engine.