Customer Acquisition & Lifetime Value

Does winning customers pay off? Enter what it costs to win a customer and what a customer brings in each month, and see the three numbers that are always judged together: the acquisition cost (CAC), the lifetime value (LTV) with the LTV:CAC ratio, and the payback period: how long until a new customer has earned back what it cost.

MarketingSubscriptionsUnit economics

Inputs

Input examples

Use the spend and the new customers of the same period (a month, a quarter). Blended CAC divides by all new customers, including those who came by themselves; paid CAC only counts customers from paid campaigns. Churn is the share of customers that leaves each month; it is assumed constant, so the average customer stays 1/churn months. The discount rate is optional: it counts later money as worth less. For education only — not financial advice.

Currency

Cost of winning a customer

Marketing spend — ads, campaigns, tools, €

Sales spend — salaries, commissions, €

New customers

Leads — optional: sign-ups, enquiries

What a customer brings in

Revenue per customer per month — €

Gross margin — % left after direct costs

Churn — % of customers leaving per month

Discount rate — % per year, optional

Payback target — months, optional: the highest CAC you can afford

What are CAC, LTV and Payback?

The customer acquisition cost is what you spend, on average, to win one new customer: marketing (advertising, campaigns, tools) and usually also sales (the people who close the deals). On its own it says little: a CAC of 500 is cheap if a customer brings in 5 000 over the years, and far too high if they buy once for 50.

The lifetime value is the profit a customer brings in over the whole relationship. It uses the margin, not the revenue. If 3% of customers leave every month, the average customer stays 1/0.03 ≈ 33 months. A common rule of thumb in subscription businesses is an LTV of at least three times the CAC; below one, every new customer loses money.

The payback period is how long a new customer has to stay before their margin covers the CAC. Until then growth costs cash. Customers who leave early never pay back, so with churn the payback of a group of customers is longer, and if churn is high enough it never comes.

LTV : CAC≥ 3 is healthy

lifetime≈ 1 / churn

paybackCAC / margin per month

churn ×2LTV ÷2

Value Built Up per Customer

LTV

expected margin so far, per customer won (allowing for churn)

lifetime value (the limit)

CAC

paid back

Result

Enter the values above

Where the Money Goes

your inputs

Part	Spend	Per new customer	Share

Churn, Lifetime and Payback

CAC 400, margin 40 a month

Churn per month	Average lifetime	Still a customer after 1 year	LTV	Payback
1%	100 months	88.6%	4 000	10.5 months
2%	50 months	78.5%	2 000	11.0 months
5%	20 months	54.0%	800	13.5 months
10%	10 months	28.2%	400	never

Worked Techniques

CAC of a Quarter

Take marketing and sales costs over the same period as the new customers. With leads: CAC = cost per lead ÷ conversion rate.

Example: 20 000 spent, 2 000 leads, 160 customers: 10 per lead, 8% conversion, CAC 125.

Lifetime Value

Margin per month times the average number of months a customer stays. Discounted at a monthly rate d it becomes m/(c + d): at 10% a year, 1 053.

Example: for LTV:CAC = 3, spend at most 1333/3 = 444 per customer.

Payback, with and without Churn

Of every customer won, a share (1 − c)^k is still there after k months, so the group as a whole pays back later than a single loyal customer.

Example: at 3% churn, 70% of the customers are still there at payback.

Sources & Verification

References

P. W. Farris, N. T. Bendle, P. E. Pfeifer & D. J. Reibstein, Marketing Metrics: The Manager’s Guide to Measuring Marketing Performance, 3rd ed., Pearson, 2016 — Ch. 5 (Customer Profitability: acquisition cost, lifetime value and payback).
R. A. Brealey, S. C. Myers & F. Allen, Principles of Corporate Finance, 13th ed., McGraw-Hill Education, 2020 — Ch. 2 (How to Calculate Present Values).