The Importance of Payback Period for SaaS Startups

tomtunguz.com – 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 15 months on a gross margin basis. 

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 $625k 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.