ModeldrillCAC and LTV
Customer acquisition cost (CAC) = sales and marketing spend / new customers won in the period. Lifetime value (LTV) = average revenue per customer per period x gross margin / churn rate per period. LTV / CAC above 3 and a CAC payback under 12 to 18 months are common targets for subscription businesses.
Syntax
CAC = S&M spend / new customers; LTV = ARPU x gross margin % / churn %; CAC payback (months) = CAC / (monthly ARPU x gross margin %)| Part | What it is |
|---|---|
ARPU | Average revenue per customer per month (or year, if churn is annual) |
gross margin % | Share of revenue left after cost of serving the customer |
churn % | Share of customers lost per period; 1 / churn is the average lifetime in periods |
Examples
S&M spend 50,000, 500 new customers
=50000 / 500Result: CAC 100
ARPU 30 per month, gross margin 80%, monthly churn 5%
=30 * 80% / 5%Result: LTV 480
LTV / CAC = 480 / 100 = 4.8.
CAC payback
=100 / (30 * 80%)Result: 4.17 months
Common mistakes
- LTV on revenue instead of gross margin, which overstates value for businesses with real cost of service.
- Mixing monthly ARPU with annual churn; both must use the same period.
- Including existing-customer marketing or all salaries in CAC without allocating; be consistent between periods.
Practice CAC and LTV
These drills check your answer on live data, free, no account needed.
- CAC payback and lifetime valueFor each acquisition channel, fill the cost to acquire a customer (column G), the months of gross profit needed to earn it back (column H), the lifetime value as monthly gross profit divided by churn (column I) and the ratio of lifetime value to acquisition cost (column J).
- Cohort payback by monthFollow one customer over a year. Fill the share still active (row 7: one less churn, raised to months since the start), the expected gross profit (row 8), the cumulative gross profit (row 9) and, in B11, the first month in which the cumulative total reaches the acquisition cost in B4.
- Twelve months of subscribersBuild a monthly subscription forecast. Each month, the customers at the end equal the prior month less churn, plus new customers. Fill row 8 (January works from the starting customers in B2) and row 9 (revenue is month-end customers times price).
Questions
What is a good LTV to CAC ratio?
Around 3x is the usual benchmark; well below it means acquisition is too expensive, far above it may mean underinvesting in growth.
How is LTV different from a payback calculation?
LTV totals the margin over the whole expected life; CAC payback asks only how many months of margin it takes to recover the acquisition cost.
Related
- Cohort analysisA cohort analysis groups customers by start month and tracks retention, revenue and cumulative contribution over time. Layout, retention formula and payback.
- Payback periodPayback period = years before full recovery + unrecovered amount / cash flow in the recovery year. Simple and discounted versions, exact examples, formula.
- Gross marginGross margin = (revenue - COGS) / revenue. The formula, worked examples with exact percentages, the difference between margin and markup and common mistakes.
- Revenue growth and CAGRCAGR = (end value / start value)^(1 / years) - 1, or =RRI(years, start, end) in Excel. Year over year growth, exact examples and the off-by-one trap in n.