Payback period is how long it takes a SaaS company to fully recoup the total operating loss spent to generate net new ARR. The formula is 1 year / (net new ARR / net operating loss); the new ARR and net operating loss are over a 12 month period to eliminate seasonality. It’s a fully loaded calculation that includes the cost of COGS, S&M, 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 SaaS business.
Below are the past 13 quarters of payback period for every SaaS IPO since 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 ~0.9 years. That’s a wonderful payback, especially given the median net dollar retention of these companies is 108%. 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 ~0.9 year payback period is even better than it sounds.
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 14 of the companies shown above were profitable in Q4 2024.
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 2.5+ year payback period, even if retention is excellent).
Thank you for the readership. Visit blossomstreetventures.com for more blogs and SaaS data. Email the author at sammy@blossomstreetventures.com or connect on LinkedIn.
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