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    RETENTION & ACQUISITION

    Does customer value recover acquisition cost?

    Estimate customer lifetime value (LTV) from monthly revenue, gross margin and customer churn. Compare it with customer acquisition cost (CAC), then see how customer losses delay recovery of that cost.

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    Your planning assumptions

    Start with the example, then change the inputs.

    Your planning assumptions
    Use one currency for every amount. Enter 5,000 for five thousand; changing the currency label does not convert your inputs.
    Average recurring revenue per paying account, normalized to one month.
    0–100%. Include the cost to serve the account in your margin definition.
    0–100% of accounts lost each month. Use customer churn, not revenue churn.
    Fully loaded sales and marketing acquisition cost for the same segment.
    Whole months from 1 to 120; not a cap on the infinite-lifetime estimate.

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    Methodology

    Contribution, retention and acquisition must match.

    Monthly gross contribution is revenue per account multiplied by gross margin. At constant positive monthly customer churn c, expected lifetime contribution is that monthly contribution divided by c. LTV/CAC compares that gross contribution estimate with acquisition cost; it is not revenue return or a company valuation.

    Simple payback divides CAC by monthly contribution and ignores churn during recovery. The cohort curve instead starts with one account earning contribution in month 1, then multiplies each later month by the surviving fraction. The first observed month whose cumulative contribution covers CAC is the cohort recovery date.

    Monthly contribution = monthly revenue × gross margin
    Gross-margin LTV = monthly contribution ÷ monthly customer churn
    LTV / CAC = gross-margin LTV ÷ positive CAC
    Simple payback = CAC ÷ positive monthly contribution
    Expected month m contribution = monthly contribution × (1 − churn)^(m − 1)

    Illustrative worked example

    At $100 monthly revenue, 80% margin and 5% monthly customer churn, contribution is $80 per month and LTV is $1,600. With $600 CAC, LTV/CAC is about 2.67× and simple payback is 7.5 months. After accounting for attrition, expected cumulative contribution first covers CAC at month 10.

    Worked example values
    MeasureIllustrative result
    Monthly gross contribution$80
    Gross-margin LTV$1,600
    Simple payback before churn7.5 months
    Expected cohort recoveryMonth 10

    Assumptions and limits

    • This is one stable segment: no expansion, price changes, cohort-age effects, discounting, overhead or customer-level variability. Gross contribution is not free cash flow.
    • Zero churn with positive contribution gives an unbounded infinite-horizon estimate, not a finite LTV. At 100% churn the cohort earns month 1 contribution only.
    • Zero CAC makes the ratio undefined and cost recovery immediate. Zero gross contribution cannot recover a positive CAC.
    • When contribution is positive and monthly churn is between 0% and 100%, the cohort approaches its lifetime contribution limit without reaching it in a finite month. CAC equal to that limit therefore has no recovery month.

    Why can a strong LTV/CAC ratio still create a cash problem?

    Acquisition cost is paid before most recurring contribution is earned. Slow recovery can require substantial funding even when lifetime contribution exceeds CAC. Compare the cohort recovery month with cash runway, and use actual billing and collection dates for a cash plan.

    Primary methodology references

    David Skok: SaaS metrics definitions. Gross-margin LTV, CAC and months to recover acquisition cost. The geometric cohort schedule and first-month contribution convention are derived explicitly for this tool.

    Worked examples explain the calculation, not expected business results.