Payback period on spend is defined as net new revenue divided by net operating loss. It’s a fully weighted calculation that includes the cost of COGS, G&A, and R&D. Traditional views of payback period compare new revenue to S&M spend only, and while that’s good for evaluating just the S&M organization, it doesn’t account for all the costs of really running a business.
So what’s a good payback period in SaaS? Below is the past 7 quarters of payback period for the last 62 SaaS IPO’s, which goes back to MongoDB in October 2017. The payback period data and observations are below.
Consistent performance. Publicly traded SaaS companies are achieving a payback period on total spend of 1.3 to 1.4 years. That’s a fine level of payback, especially given the median net dollar retention of these companies is 112%. With such high retention, each dollar of spend is actually creating a growing annuity. Payback period doesn’t account for the customer growing with you over time, so a 1.3 to 1.4 year payback period is even better than it sounds.
Q3 2023 shows a big jump. While a 1.3 year payback period is excellent, in Q3 2023 it got even better at 1.1 years.
Profitability. The data above only looks at SaaS companies still burning cash. Those that are profitable or that don’t grow don’t have a measurable payback period. Payback period is only applicable to those companies that are burning cash to grow. Note that 19 of the companies shown above were profitable in Q3 2023, whereas only 12 were profitable in Q1 2022.
Shoot for a payback period inside of 1.5 years. If you start bleeding over 2 years, while that doesn’t sound terrible, your peers will be outperforming you and it will impact valuation or even your ability to raise money (for instance we wont invest in a company with a 3 year payback period, even if retention is excellent).
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