What is a Best in Class Payback Period for a Software Company in 2020?

Payback period is one of the best composite diagnostic metrics of product market fit. I’ve written before about the benefits of short payback periods. In short, startups with shorter payback periods require less capital and also grow more quickly. In 2020, what is an excellent payback period[1]?

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Here is a group of publicly traded companies sorted by estimated payback period[2]. Zoom is at the top with a payback period of just over 3 months. DataDog, Slack, Crowdstrike, and Twilio round out the top 5 at 7 months or less.

Those are exceptionally efficient businesses. It bears noting that 4 of the top 5 started out as bottoms up businesses, which have grown to support enterprise customers as they’ve matured. Zoom, DataDog, Slack, and Twilio all share this pattern.

The top quartile is 15 months; the median is 22 months; and the bottom quartile is 29 months. These figures have increased over the past four years, but the change isn’t statistically significant.

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I was curious about any relationships that existed between sales efficiency and gross margin. One might hypothesize the greater the gross profit of a business, the better potential sales efficiency. But there’s no correlation. R^2 is -0.-04 - truly none.

I also looked at sales and marketing as a percentage of revenue, which bore a similar result. I suspect average contract value may have some relationship with the sales efficiency though.

Starting with a low ACV enables a company to expand accounts significantly. More importantly, it requires the company establish an efficient go-to-market from the outset; a discipline that benefits the business throughout its life.

[1] Just how do we define payback period? It is amount of time a customer repays the cost of customer acquisition with gross profit dollars. It’s also the inverse of the gross profit sales efficiency.

[2] For these companies, I’m estimating payback period by using the marginal gross profit and total selling and marketing expenses each reports annually.