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I love payback period, it's a great metric. But it's easy to take it too literally. It's meant to be a tool to help you make prioritization decisions ("what if

I love payback period, it's a great metric. But it's easy to take it too literally. It's meant to be a tool to help you make prioritization decisions ("what if we do this instead of that"), but people often use it as a management report ("we did this; here's the verdict"). Here's a SaaS example: if it costs you $1000 to acquire a customer that pays you $100/month, the PBP is 10. That doesn't sound amazing. But you have options! If you give the customer a 20% discount to pay annually, they're now paying you ~$1000 upfront, for a PBP of 0. Tweak the numbers slightly and you can get a negative payback period. Suddenly your "capital inefficient" business has a big flywheel without the need for outside capital. It's easy to think decreasing acquisition costs is what you need to do in the current market (and believe me, that's not a bad idea!), but that's the denominator. There's also a numerator - how much cash you bring in, and how quickly - that matters just as much. It's cash flow that matters, not profit.

ecpottinger 4y ago
My dad had great ideas for businesses. Yet each one he started failed for him. Why, because he has such unrealistic view on how long the payback period will be. He even founded with a partner what is now a national company, but at the time it did not make a big profit in the first year, so he sold his share of the business. He had "Get rich Quick" fever, and never saw that bussiness rarely become an overnight success.
- birdyrooster 4y ago
  Interesting to think that the company which he divested from may have made it because of his exit.
  - petemc_ 4y ago
    Unless you have some information you're not sharing, this is a pretty horrible thing to say.
    - tnel77 4y ago
      I don’t feel like it’s horrible. If one of your founding members is focused on getting rich quick while the rest are trying to invest in the company long-term, then his departure very well could have helped the company ultimately succeed.
    - anonymous_sorry 4y ago
      Is it horrible to suppose that someone might not be well-suited to the task of driving a business from nothing to a national concern? Because I personally suspect that of most people, including myself, and don't think of myself as particularly mean-spirited. Also, the offspring of the man in question identifies an aspect of his temperament that led to things turning out the way they did.
- rrrrrrrrrrrryan 4y ago
  One of my finance professors mentioned that ~70% of business fail in their first two years, and ~90% of those failures are purely due to a lack of working capital, not due to any fundamental flaw in the business plan. If they kept doing the same thing and just had more money and time, things would have eventually worked out. People start businesses for emotional reasons, not logical ones, and vastly, vastly underestimate the amount of money they'll need to get the thing off the ground. Entrepreneurial people are inherently optimistic, (and they have to be), but he said their estimates were typically off by ~5x. If you think you need a million dollars of runway, you probably need 5 million. If you think it'll take a year to achieve profitability, it'll probably take 5 years.
  - yunohn 4y ago
    > due to a lack of working capital, not due to any fundamental flaw in the business plan. If they kept doing the same thing and just had more money and time, things would have eventually worked out. Ironically, that’s what VC funding aims to provide - capital to extend runway and improve scale quickly. Whereas the reality is VCs support negative unit economics and absurd customer acquisition costs.
  - moonchrome 4y ago
    > One of my finance professors mentioned that ~70% of business fail in their first two years, and ~90% of those failures are purely due to a lack of working capital, not due to any fundamental flaw in the business plan. Having seen my share of failed businesses - I'm very skeptical of these numbers.
    - dtgriscom 4y ago
      ... skeptical in which direction?
    - mindwok 4y ago
      Also skeptical. How would you determine if a business would have succeeded if it had working capital to continue?
- toss1 4y ago
  Yup, just about every time I've read of an 'overnight success', it was indeed an a very rapid path to success . . . after a decade or two of slogging it out in the trenches of obscurity. There are a lot of moving parts, a lot to learn, and timing/luck are also factors. Until they all hit at the same time, it looks like a flop. It takes time to find, learn, or assemble all the key bits. Sorry your dad's impatience was so persistent. Sense of urgency is important, but impatience is deadly. Thanks for sharing such a clear example.
- hgomersall 4y ago
  So far, my experience has been that business as a start-up is basically about surviving long enough to make a profit. Of course, some ideas are just bad, but I'm convinced loads of start-ups that failed could have been made to work given sufficient time. This doesn't work so well if you take a pile of capital, but if you go for organic growth it is more plausible to survive hand to mouth for a while.
  - bruce511 4y ago
    >> Of course, some ideas are just bad, but I'm convinced loads of start-ups that failed could have been made to work given sufficient time. Are some businesses under capitalised? Sure. Could "loads" be saved with more capital? Well yes, for some definition of "loads". But annedotally I'd suggest that "most" are just bad ideas. Or perhaps more accurately "incomplete ideas". To be a success business you need; A) a product B) a market for the product (ie people who would actually dip in their pockets) C) that you can reach via marketing D) that can afford the product. The vast majority of business ideas have A, a few do B but its very rare that they consider C or D. As techies we're all about A - build it and they will come. But a successful business needs all 4 - miss one out and you fail.
    - hgomersall 4y ago
      Incomplete is probably a better assessment. Survival until they make it is probably really about survival until they learn everything they need to know and develop the sales channels etc to be able to make it.
exelib 4y ago
Great example! I think your example exactly points out why PBP of 0 is soo awesome in this case! You can invest $1000 immediately and get another customer in 0 months instead of 10. If they pay upfront again, so you can invest it again and so on.
throwaway292939 4y ago
> If you give the customer a 20% discount to pay annually, they're now paying you ~$1000 upfront, for a PBP of 0 This sounds like a huge assumption being made here - as in, this is not as easy as it sounds.
- ghiculescu 4y ago
  What’s the assumption? We do this all the time so if I’m missing something I’m keen to hear it :)
  - soVeryTired 4y ago
    Maybe I've misunderstood here but it sounds like you're comparing the revenue brought in from a customer to the cost of attracting them in the first place. Doesn't that ignore costs like ongoing customer service and maintaining the systems the customer is actually using? Or are all those numbers rolled up into "cost of acquisition"?
    - ghiculescu 4y ago
      We typically calculate payback period using all go to market costs (sales + marketing + CS), but not product development or any COGS (which includes things like AWS costs). Again, it's not a management report. You should use it for prioritisation. For example, all our go-to-market is very country-specific. So we can look at the payback period for different countries and compare how well they are performing, and that tell us which ones we should invest more into. Every business should do it differently, based on which expenses are fixed or variable for them.
- sbierwagen 4y ago
  Not every customer will take that option. The PBP is 0 for that customer, not the entire population.
ckdarby 4y ago
Two good friends were running a sketchy Instagram business back in the day. They had a massive churn issue around 3 months. They knew this was a cash cow that was printing money but someday it'd come to a end abruptly. I suggested to them to offer 20% to their existing customers to switch to annual. They made ~$60k in a day and knew they'd have to refund if things went south before the annual contract ended. They were able to deploy the capital into marketing and explode. In the end they had to shutdown but not before each founder had taken home +$250k and invested into legitimate means.
jschveibinz 4y ago
This is indeed an excellent strategy, and is perhaps the greatest advancement ever in business models. Nevertheless, there is still a cost-benefit snd cash flow analysis necessary for the amount of that discount. This works easily for software businesses because the gross margins are so high. But that 20% is still money left on the table…

ecpottinger 4y ago

My dad had great ideas for businesses. Yet each one he started failed for him. Why, because he has such unrealistic view on how long the payback period will be. He even founded with a partner what is now a national company, but at the time it did not make a big profit in the first year, so he sold his share of the business. He had "Get rich Quick" fever, and never saw that bussiness rarely become an overnight success.

birdyrooster 4y ago
Interesting to think that the company which he divested from may have made it because of his exit.
- petemc_ 4y ago
  Unless you have some information you're not sharing, this is a pretty horrible thing to say.
  - tnel77 4y ago
    I don’t feel like it’s horrible. If one of your founding members is focused on getting rich quick while the rest are trying to invest in the company long-term, then his departure very well could have helped the company ultimately succeed.
  - anonymous_sorry 4y ago
    Is it horrible to suppose that someone might not be well-suited to the task of driving a business from nothing to a national concern? Because I personally suspect that of most people, including myself, and don't think of myself as particularly mean-spirited. Also, the offspring of the man in question identifies an aspect of his temperament that led to things turning out the way they did.
rrrrrrrrrrrryan 4y ago
One of my finance professors mentioned that ~70% of business fail in their first two years, and ~90% of those failures are purely due to a lack of working capital, not due to any fundamental flaw in the business plan. If they kept doing the same thing and just had more money and time, things would have eventually worked out. People start businesses for emotional reasons, not logical ones, and vastly, vastly underestimate the amount of money they'll need to get the thing off the ground. Entrepreneurial people are inherently optimistic, (and they have to be), but he said their estimates were typically off by ~5x. If you think you need a million dollars of runway, you probably need 5 million. If you think it'll take a year to achieve profitability, it'll probably take 5 years.
- yunohn 4y ago
  > due to a lack of working capital, not due to any fundamental flaw in the business plan. If they kept doing the same thing and just had more money and time, things would have eventually worked out. Ironically, that’s what VC funding aims to provide - capital to extend runway and improve scale quickly. Whereas the reality is VCs support negative unit economics and absurd customer acquisition costs.
- moonchrome 4y ago
  > One of my finance professors mentioned that ~70% of business fail in their first two years, and ~90% of those failures are purely due to a lack of working capital, not due to any fundamental flaw in the business plan. Having seen my share of failed businesses - I'm very skeptical of these numbers.
  - dtgriscom 4y ago
    ... skeptical in which direction?
  - mindwok 4y ago
    Also skeptical. How would you determine if a business would have succeeded if it had working capital to continue?
toss1 4y ago
Yup, just about every time I've read of an 'overnight success', it was indeed an a very rapid path to success . . . after a decade or two of slogging it out in the trenches of obscurity. There are a lot of moving parts, a lot to learn, and timing/luck are also factors. Until they all hit at the same time, it looks like a flop. It takes time to find, learn, or assemble all the key bits. Sorry your dad's impatience was so persistent. Sense of urgency is important, but impatience is deadly. Thanks for sharing such a clear example.
hgomersall 4y ago
So far, my experience has been that business as a start-up is basically about surviving long enough to make a profit. Of course, some ideas are just bad, but I'm convinced loads of start-ups that failed could have been made to work given sufficient time. This doesn't work so well if you take a pile of capital, but if you go for organic growth it is more plausible to survive hand to mouth for a while.
- bruce511 4y ago
  >> Of course, some ideas are just bad, but I'm convinced loads of start-ups that failed could have been made to work given sufficient time. Are some businesses under capitalised? Sure. Could "loads" be saved with more capital? Well yes, for some definition of "loads". But annedotally I'd suggest that "most" are just bad ideas. Or perhaps more accurately "incomplete ideas". To be a success business you need; A) a product B) a market for the product (ie people who would actually dip in their pockets) C) that you can reach via marketing D) that can afford the product. The vast majority of business ideas have A, a few do B but its very rare that they consider C or D. As techies we're all about A - build it and they will come. But a successful business needs all 4 - miss one out and you fail.
  - hgomersall 4y ago
    Incomplete is probably a better assessment. Survival until they make it is probably really about survival until they learn everything they need to know and develop the sales channels etc to be able to make it.

exelib 4y ago

Great example! I think your example exactly points out why PBP of 0 is soo awesome in this case! You can invest $1000 immediately and get another customer in 0 months instead of 10. If they pay upfront again, so you can invest it again and so on.

throwaway292939 4y ago

> If you give the customer a 20% discount to pay annually, they're now paying you ~$1000 upfront, for a PBP of 0 This sounds like a huge assumption being made here - as in, this is not as easy as it sounds.

ghiculescu 4y ago
What’s the assumption? We do this all the time so if I’m missing something I’m keen to hear it :)
- soVeryTired 4y ago
  Maybe I've misunderstood here but it sounds like you're comparing the revenue brought in from a customer to the cost of attracting them in the first place. Doesn't that ignore costs like ongoing customer service and maintaining the systems the customer is actually using? Or are all those numbers rolled up into "cost of acquisition"?
  - ghiculescu 4y ago
    We typically calculate payback period using all go to market costs (sales + marketing + CS), but not product development or any COGS (which includes things like AWS costs). Again, it's not a management report. You should use it for prioritisation. For example, all our go-to-market is very country-specific. So we can look at the payback period for different countries and compare how well they are performing, and that tell us which ones we should invest more into. Every business should do it differently, based on which expenses are fixed or variable for them.
sbierwagen 4y ago
Not every customer will take that option. The PBP is 0 for that customer, not the entire population.

ckdarby 4y ago

Two good friends were running a sketchy Instagram business back in the day. They had a massive churn issue around 3 months. They knew this was a cash cow that was printing money but someday it'd come to a end abruptly. I suggested to them to offer 20% to their existing customers to switch to annual. They made ~$60k in a day and knew they'd have to refund if things went south before the annual contract ended. They were able to deploy the capital into marketing and explode. In the end they had to shutdown but not before each founder had taken home +$250k and invested into legitimate means.

jschveibinz 4y ago

This is indeed an excellent strategy, and is perhaps the greatest advancement ever in business models. Nevertheless, there is still a cost-benefit snd cash flow analysis necessary for the amount of that discount. This works easily for software businesses because the gross margins are so high. But that 20% is still money left on the table…