LTV:CAC Calculator

What this tool does

CM8-366 works out what a customer is worth over their life, segment by segment, and sets it against what they cost to acquire. It computes lifetime value month by month with survival weighting and a hard horizon cap, shows the payback period alongside the ratio, and reports what the usual shortcut would have claimed so you can see the difference.

Everything runs inside this single file — no account, no upload, no network request of any kind.

Margin, never revenue

Lifetime value is built on gross profit. A customer paying 100 a month at 30% margin is worth 30 a month to you, not 100. Building lifetime value on revenue overstates it by the whole cost of goods, and it is the most common error in this calculation after the churn shortcut.

The cost-to-serve field is for anything that scales per customer and is not already inside the gross margin: support, account management, hosting per seat. Where a segment is cheap to sell to and expensive to keep, this field is what reveals it.

Why not revenue divided by churn

The shortcut everybody uses is monthly margin ÷ monthly churn, which is the same as assuming a customer lasts 1 ÷ churn months. At 2% churn that is 50 months; at 1% it is 100 months — more than eight years.

Two things are wrong with it. It assumes churn stays constant forever, when in reality early churn is usually much higher than late churn. And it runs to infinity, valuing money you might receive in year nine at full face value.

The tool reports the shortcut's answer in the workings table, next to its own, so the gap is visible. In most businesses it is between fifty percent and three times too high.

The horizon cap

The most important setting in this tool. Nothing beyond about three years is predictable: your product will change, your prices will change, the competition will change, and the customer's business will change. Valuing month forty-eight at all is a claim about a world nobody can see.

Thirty-six months is the default and a defensible choice. Twelve is conservative and appropriate for a fast-moving market. Anything beyond sixty is a forecast dressed as arithmetic.

The cap is also what makes the calculation safe: without it, any segment where expansion exceeds churn produces an infinite lifetime value.

The calculation in full

Every one of these appears in the workings table with the figures filled in.

Two models

Subscription — they pay every month until they leave. You need monthly revenue and monthly churn. This is the cleaner of the two because both figures are directly observable.

Repeat purchase — they buy now and again. You need average order value, orders a year, and the share of customers who buy again the following year. The tool converts annual retention into a monthly equivalent by taking the twelfth root, which smooths out buying that in reality arrives in lumps. For a business where customers order twice a year that is a reasonable approximation; for one where they order once every three years it is not, and a cohort analysis is the honest alternative.

Expansion, and the figure that runs away

Expansion is upgrades and extra usage from customers who stay. Where it exceeds churn, revenue from a cohort grows even as customers leave — net revenue retention above 100%, the position every subscription business wants.

It also breaks the arithmetic. With expansion above churn, an uncapped lifetime value is infinite: the cohort is worth more every month forever. The horizon cap is what makes the figure finite, and this is the case where the cap is doing all the work rather than trimming a tail.

The tool warns when expansion is at or above churn. That is not a mistake — the sample has two segments like it — but it does mean the lifetime value is entirely a statement about your chosen horizon, and you should say so when you quote it.

Reading the ratio

• Below 1 — you lose money on every customer you win. Growth makes it worse.
• 1 to 3 — profitable per customer, probably not enough to cover the overhead that is not in the gross margin.
• 3 to 5 — the healthy range for most businesses.
• Above 5 — usually a sign of underspending, not of excellence. If a customer returns eight times what they cost, there is almost certainly more demand available at a higher acquisition cost, and somebody else will buy it.

Where three to one comes from

It is a convention from venture-backed software, not a law, and it exists because gross margin has to cover more than acquisition: product, support, general overhead and some profit. Three is roughly what is left over once those are paid for at typical software margins.

At a 30% gross margin the same logic gives a very different answer. Set the target from your own cost structure: work out what share of gross profit is available for acquisition after everything else, and the reciprocal of that share is your target ratio.

Why payback matters more than the ratio

The ratio tells you whether a customer is worth winning. Payback tells you how long your money is tied up — and for any business that is not sitting on cash, that is the binding constraint.

A segment with a 6:1 ratio and a 30-month payback will bankrupt a growing company long before it makes it rich, because every new customer is a hole in the bank account for two and a half years. Twelve months is a common target; under six months you can grow as fast as demand allows.

Segment, or the average will lie to you

A single blended lifetime value is nearly always wrong, because the customers who churn fast and the ones who stay for years are averaged into a fictional customer who resembles neither. In the sample, the enterprise segment is worth roughly a hundred times the online one-off segment; an average across them describes nobody.

Split by whatever genuinely changes behaviour: size, plan, channel, whether they were acquired on a discount. The blended figures on the tiles are weighted by customer count where you supply it, which is the only honest way to blend them.

Which lever to pull

Four levers, in the order they usually pay:

• Retention. The most powerful by a distance, because it moves the ratio and the expected life together. Dropping monthly churn from 5% to 4% adds about a fifth to lifetime value.
• Gross margin. Straight through to the bottom of the calculation.
• Revenue per customer. Price rises and expansion, which also shorten the payback.
• Acquisition cost. The one everybody reaches for first, and usually the hardest to move without also reducing volume.

What this cannot know

• Whether your churn figure is measured properly. Churn on a young customer base is systematically understated, because nobody has had time to leave yet.
• Whether churn is constant. It rarely is — early churn is usually far higher — and this calculation assumes it.
• Whether customers acquired more cheaply behave the same way. They usually do not, which is why the ratio deteriorates as you scale a channel.
• Anything about referrals. A customer who brings two more is worth far more than this shows.
• Whether your gross margin includes what you think it does.

Printing and sharing

The Report tab prints the tiles, charts and both tables with a title block you fill in. The workings table shows every step including the shortcut's answer, which is the fastest way to settle an argument about why the figure is lower than somebody remembered.

Saving your work

Segments are held in this browser, on this computer, and stay there between visits. Use the backup button to write a JSON file you control.

Accuracy & disclaimer

Lifetime value is a forecast. This tool makes the forecast explicit, conservative and checkable; it does not make it true. Every input is yours, and the ratio inherits the optimism of all three of them at once.