One of the best gauges of your business’s ability to scale, is this metric, Sales Payback Period (SPP). SPP sets up a ratio between customer acquisition cost, and annual gross margin.
Here’s an example to bring this concept home. A company sells intruder detection software on an annual subscription basis. In other words, a Saas business model. A one year subscription sells for $3,500. It costs the company $2,000 to install and service the account, yielding a gross margin of $1,500. The company incurs an average of $3,000 of sales and marketing expense for each deal.
The company has a 24 month SPP ($3,000 / $1,500) * 12. It takes 24 months for the company to recoup it’s sales and marketing expense.
This metric should be compared to historical numbers at the company , and also benchmarked against industry averages. Why is SPP the MacDaddy of metrics? Because it gives us a combined assessment of sales performance and service efficiency. Improving on either, will decrease our payback period.