3. It presumes ongoing profitability
It becomes more misleading when customers churn or downgrade after their payback period. The payback period presumes that once customers become profitable, they stay profitable - but SaaS businesses know that is far from reality.
How to overcome: The answer is to be clear about what payback period is illustrating, and not be tempted to use it to make long term revenue and profit projections.
4. It ignores upgrades (sometimes)
What type of revenue you include makes a difference to the payback period. If you only count revenue from the initial subscription and miss extra revenue from upgrades or price increases generated during the payback period, then you’ll be understating the payback period. And at what moment do you stop recognizing new revenue - at the exact point a customer reaches their acquisition cost (to the dollar and cents), or do you include everything in the time period you are measuring?
How to overcome: The answer is to have clear definitions in place of how you are going to define revenue for the purposes of calculating payback period; and the analytical systems that allow you to pull the data accurately.
5. What counts as a cost?
Some acquisition costs are obvious, such as advertising and marketing spend. Some are less so - for example press coverage, hackathon events and how you support your current customers all feed into your brand reputation. In theory, payback period should include all customer acquisition costs, not just the direct ones. But attributing an activity to a customer acquisition is easier said than done.
How to overcome: Though accuracy is important, consistency is more so as it allows you to compare payback period over time.
6. It is ambiguous about who to include
You need to be clear about what constitutes a new customer. Is it fair to include extra users in existing accounts, where there may have been very little, if any, acquisition cost? Also should you treat the cost and revenue of returning customers in the same way as brand new ones?
How to overcome: Again, the answer is to have clear definitions in place, to ensure you are measuring payback period consistently.
7. It does not account for inflation
As payback period measures cost of acquisition at a specific moment in time, that part of the calculation can be skewed by inflation. In other words, $10 last year is not worth the same as $10 this year. The problem is more profound when calculating payback over longer periods; and more so if you regularly adjust your prices for inflation.
How to overcome: The answer is to adjust the cost of acquisition in your analysis, so it remains relative.