CJ Gustafson published a good piece with AJ Ljubich from Datadog's FP&A team arguing that CAC payback is more useful than LTV:CAC. The operational case holds. LTV:CAC moves too much on assumptions to run anything with, and payback is a number you can act on this quarter.
There's a dimension missing from the conversation, and it's worth about four months.
A 27% shorter payback period, on identical acquisition spend
$12,000 to acquire a customer. They pay $1,000 a month at an 80% gross margin. Payback lands at month 15.
Now get that same customer to expand to $1,500 a month at month three.
Payback lands at month 11.
Same customer, same acquisition cost, same everything, except somebody sold them the next thing when they were ready for it. Do it at month six instead and you still take three months off.
That's one action showing up in two numbers at once. The payback date moves in and the lifetime value goes up, from a single conversation in month three.
Which is why they aren't alternatives
Payback asks when the money comes back. Lifetime value asks how much of it there is.
Expansion is the only input that improves both answers at the same time. Acquisition spend can only make payback worse. Pricing helps payback and can cost you retention. Cutting delivery cost helps margin and eventually costs you both.
Expansion is the exception, and it's the hardest one to see, because it arrives late and nobody put it in a plan.
It's already in the number, uncounted
Payback as they define it is sales and marketing cost divided by revenue additions, times gross margin. Revenue additions is the year-on-year change in the most recent quarter, annualized.
That's net new revenue, so expansion is already in that denominator. It's improving reported payback right now, in most companies, without anybody having decided to make it happen.
Same $10M of S&M at 80% margin: $8M of additions all from new logos, or $4M new and $4M expansion, or $2M new and $6M expansion. All three report a 12 month payback.
Three different businesses, one number. The expansion is in there. It just showed up on its own, so nobody counts it as a lever.
Which is exactly how expansion arrives
Quietly. Unexpectedly. Not repeatably.
So it gets folded into the equation without much fanfare, and that's the right treatment for what it currently is. You can't build a payback strategy on revenue that turns up when it feels like it, and nobody was wrong to leave it out.
Three things change what it is, and none of them are analytical.
Strategic unbundling, so something remains to sell rather than everything going in at signature at a discount. Orchestration, so the ask happens when a customer hits a readiness gate rather than when the renewal calendar comes around. Behavioral engineering, so they know what's coming and have budgeted for it months before it's offered.
Do those and the month-three expansion stops being luck. It becomes a date you can plan against, which is the entire difference between revenue that describes what happened and revenue you can move.
What to do with it
Run payback twice. New-logo revenue only, then again including expansion.
The first number tells you what that customer cost. The second tells you what they went on to do.
A customer who paid you once and then bought more is a more efficient acquisition than one who only ever paid once, and the first number can't tell them apart. The gap between the two is your expansion motion, priced in months.
If that gap is zero, you don't have one. Worth knowing before you decide your acquisition is inefficient and go spend more on it.
Lincoln Murphy formally named and popularized Customer Success starting in 2010 and has spent 15 years connecting it to expansion revenue and commercial outcomes. Read The Premise.