Applying the Framework
A few rules of thumb help put the framework into action. A GMPP under 12 months is great; a GMPP up to about 18 months is acceptable. After 18 months, however, the present value of those cash flows way out in the future is harder to justify against the upfront acquisition expense. For example, a GMPP of 36 months suggests that three years are required to break even on the customer acquisition cost. So if monthly churn for that cohort is just 3%, these customers will never be profitable because their lifetime is only 33.3 months against a 36 month payback period; operators should redirect resources away from cohorts displaying this sub-par performance. Alternatively, a GMPP of 12 months or less indicates tCAC is repaid within a year. Assuming manageable churn, a company with such a short GMPP should be throwing fuel on the fire and investing in efficient growth.
For rCAC benchmarks we like to see a return of at least 3x, with 5x and above being top of the class. rCAC below 3x doesn’t leave much to cover operational expenses beyond the acquisition expense and recurring COGS. Low rCAC means a company earns little over the life of each customer and new customers have to be added quickly just to replace ones that churn. Higher rCAC, on the other hand, provides more headroom to cover expenses and reinvestment. Ultimately, realizing multiples of tCAC is how SaaS companies build enterprise value.
Turning to our example, we only have one non-organic acquisition channel with passing economics – the Display channel with a GMPP of 11.7 months and an rCAC of 4.5x. As is often the case, the organic channel has superior economics, but it’s hard to “invest” in this type of customer acquisition.
We hope entrepreneurs find this updated framework useful for analyzing the unit economics of their SaaS businesses. Please see our Excel worksheet here to get started.