The formulas
- Monthly margin = revenue per customer x gross margin
- LTV = monthly margin / monthly churn
- LTV to CAC = LTV / CAC
- CAC payback = CAC / monthly margin
How it works
Lifetime value on a gross margin basis is the profit a customer brings before overhead, over the expected time they stay. With a constant monthly churn rate, expected lifetime is 1 / churn, so LTV is monthly margin divided by churn. Revenue-based LTV overstates the figure, so this tool uses margin.
CAC payback counts months of margin needed to earn back acquisition spend. A ratio near 3 and payback inside 12 to 18 months are common planning targets for subscription businesses. The formula carries no discount rate and no expansion revenue.
Illustrative figures only. Check the result against your firm's methodology before relying on it.
Common questions
What goes into CAC?
Sales and marketing spend for the period, including salaries, divided by new customers won in the period.
I have annual churn. What do I enter?
Convert it: monthly churn = 1 - (1 - annual churn)^(1/12).
Why does a small churn change move LTV so much?
Lifetime is 1 / churn. Cutting churn from 2% to 1% doubles lifetime.
Formulas on this page are the standard definitions.
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