Payback & Lifetime Value
How long a customer takes to earn back their cost, and a rough value over their lifetime.
In your head, jot if needed · no calculator why?
Opens at level 34.
the lesson
Read the lesson
The idea
Winning a customer costs money up front, and the customer earns it back a month at a time. Count contribution, what a customer leaves after the costs of serving them, never the price they pay.
Simple payback is the acquisition cost divided by the monthly contribution, in whole months. It only happens if the customer stays that long.
Lifetime value (LTV), counted in contribution, is often estimated as monthly contribution divided by monthly churn: at 5% churn, a customer lasts about 1 ÷ 0.05 = 20 months on average. That assumes churn never changes and ignores discounting, so treat it as rough. LTV-to-CAC divides it by the acquisition cost.
Techniques
Cost over monthly contribution
- Given a price and a margin, find the contribution first: price × margin.
- Divide the acquisition cost by the monthly contribution.
- Round up to whole months when it doesn't divide evenly.
worked example
A tutoring service spends $720 to win a customer who pays $200 a month. Assume a 40% contribution margin. What is simple payback in months?
- Contribution: $200 × 0.4 = $80 a month.
- $720 ÷ $80 = 9 months.
Answer: 9
Contribution over churn
- Write the monthly churn as a decimal: 4% is 0.04.
- Divide the monthly contribution by it.
- For LTV-to-CAC, divide that lifetime value by the acquisition cost.
worked example
A customer contributes $60 a month. Assume monthly churn is a steady 4%. Using contribution ÷ churn rate, what is the estimated lifetime contribution?
- $60 ÷ 0.04 = $1,500.
- That is 25 months at $60.
Answer: $1,500
Tips by skill
- TipPayback in months: Acquisition cost ÷ monthly contribution, rounded up to a whole month.
- TipPayback: contribution, not revenue: Turn the price into contribution first (price × margin), then divide the cost by it.
- TipSimple lifetime contribution: Divide the monthly contribution by the churn written as a decimal.
- TipLTV-to-CAC ratio: Lifetime value ÷ acquisition cost, given as a plain number.
Watch out for
- Dividing by the monthly price instead of the contribution. That makes payback look faster than it is.
- Rounding payback down. After the last whole month, part of the cost is still unpaid.
- Multiplying by 5 instead of dividing by 5%, which is 0.05. At 5% churn, $200 a month is about $4,000 over a lifetime, not $1,000.
- Dividing CAC by LTV. The ratio puts lifetime value on top.
skills · practice stats
-
Payback in months not tried yet
worked example
Acquisition costs $4,980 per customer, and each active customer contributes $510 a month. How many whole months does it take to earn back the acquisition cost?
Answer: 10
- $4,980 ÷ $510 ≈ 9.76, so it takes 10 whole months to earn back the cost, if the customer stays that long.
-
Payback: contribution, not revenue not tried yet
worked example
It costs $3,420 to win a customer who pays $950 a month. Assume a 40% contribution margin. What is simple payback in months?
Answer: 9
- Contribution = $950 × 0.4 = $380 a month.
- $3,420 ÷ $380 = 9 months.
-
Simple lifetime contribution not tried yet
worked example
A customer contributes $360 a month. Assume monthly churn is a steady 8%. Using contribution ÷ churn rate, what is the estimated lifetime contribution?
Answer: $4,500.00
- Average lifetime ≈ 1 ÷ 0.08 = 12.5 months; 12.5 × $360 = $4,500.
- It assumes churn stays steady forever and ignores discounting, so treat it as a rough estimate.
-
LTV-to-CAC ratio not tried yet
worked example
Estimated lifetime contribution is $250 and acquisition cost is $100. What is the LTV-to-CAC ratio? Answer as a plain number.
Answer: 2.5
- $250 ÷ $100 = 2.5: each dollar spent winning a customer is expected to return $2.50 of contribution, if the lifetime estimate holds.
rest ladder
- 1 day
- 3 days
- 7 days
- 14 days
- 30 days
- 60 days
- mastered · every 90 days