Calculate payback period and explain why it matters when a business is short of cash.
Open your bank app and write down today's balance. Then find what you spent on advertising last month and how many new customers it brought in. With those three numbers you can work out how many months your money stays tied up before a new customer has paid back what it cost to win them.
That number of months is the payback period. It's the number of months until a new customer's gross margin covers their acquisition cost. The simple formula is acquisition cost divided by monthly gross margin per customer. In the course "Digital marketing foundations: strategy before tactics", lesson 6.3 "What a customer is worth and what you can pay for one" gave you a first view of this idea. You worked it out there from rough assumptions, before any campaigns were running. Now you can work it out from real spend, real customer counts and real orders.
Farah runs a shop where customers buy now and then, and she advertises on Google search and Meta ads (her figures are invented examples). Her numbers from lesson 8.2 look reassuring. A Google search customer brings in about S$96 of margin in the first year and costs about S$48 to acquire. A Meta customer brings in about S$60 and costs about S$40. Both channels earn back more than they cost within a year.
She plans to spend more on both in the run-up to Hari Raya, and then she checks her bank balance. She'll pay for the ads in March. The margin from those customers will come in over the following twelve months. In the same month she has festive stock to buy. For that month, how long payback takes matters more to her than whether it happens at all.
The same thing happens in any business. You pay the cost first and the value comes later, so a channel can look excellent on lifetime value and still cause a cash squeeze. Even a channel that pays back within a year can strain cash, because you pay the cost up front and the margin comes in over time. If you double your spend on a slow-payback channel, you double the cash going out before any comes back. The more successful the channel is, the deeper the short-term hole in your account. Businesses have run out of cash while acquiring customers who would eventually have been profitable.
Payback turns "this channel is worth it" into "this channel ties up our money for this many months". You answer that question by looking at the bank account. Large companies with investors and credit lines can accept a long payback because they have money to wait with. A small business usually can't, because its cash is the owner's savings, a small overdraft and next month's sales. Cash usually runs out long before lifetime value arrives, so small businesses usually care more about payback. Lifetime value tells you whether a customer is worth winning at all. Payback tells you whether you can afford to win many at once, and how quickly the money comes back for you to spend again. Picture a channel whose customers are worth a great deal over three years but take twelve months to pay back. It can be a sound channel that you still can't afford to grow quickly.
Start with acquisition cost per customer, using real spend and real customer counts. Work it out for each channel, and blended across all of them. Then take gross margin from real orders.
Next, turn that margin into a monthly figure per customer. If you charge a subscription or a monthly fee, you can read it straight off the fee: the monthly fee times your margin percentage. If customers buy now and then, divide first-year margin by 12. Spreading margin evenly over 12 months is a simplification, because a large share of margin usually comes with the first order. It's still a fair way to compare channels with each other. Divide acquisition cost by monthly margin and the result is payback in months.
For Farah, Google search gives S$96 / 12 = S$8 a month and Meta gives S$60 / 12 = S$5 a month. Google search pays back in S$48 / S$8 = 6 months. Meta pays back in S$40 / S$5 = 8 months. Meta is cheaper per customer (S$40 vs S$48) but takes 2 months longer to pay back. Every extra dollar she puts into Meta in March comes back over eight months. Before the festive season she needs to check that the business can carry that alongside her stock purchases.
Priya runs classes where students pay a monthly fee (her figures, also from lesson 8.2, are invented examples). Her students pay S$320 a month at about 60 percent gross margin, which gives S$192 a month. Her blended acquisition cost is S$200. S$200 / S$192 is just over one month, so once a new student has paid the first month's fee, they've covered their acquisition cost. Spending more on channels that bring her students is low risk for her cash, as long as she has seats in her classes.
Once you have payback for each channel, compare them. As lesson 8.1 explained, per-channel acquisition costs depend on attribution, so the comparison may change if costs are calculated a different way. Treat per-channel payback as a guide and the blended figure as the anchor.
Then check whether your cash can carry the spend until the payback arrives, alongside your other outgoings such as stock. Your real figures will differ from your early assumptions, sometimes by a lot. The gap between them teaches you more than either number does on its own.
Work out your payback figures again every quarter. When a channel's payback stretches, check whether acquisition cost has risen or customer value has fallen. Each of those calls for a different response, so find the cause before you change your spending.
With payback worked out for your biggest channels, it gets easier to argue where the next few hundred dollars should go. Start with the balance, spend and customer count you wrote down at the top, and work out payback for each of your biggest channels.
Calculate the payback period for your two biggest channels. Then write down which one you would put the next S$500 into, and why.
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