LTV, CAC, and payback period: three numbers that decide if growth spending is sane
LTV bigger than CAC sounds like enough to justify spending on growth. It's not, by itself. Payback period is the number that decides whether the company survives long enough to collect.
CAC (Customer Acquisition Cost) is how much it costs, on average, to turn one new person into a customer. LTV (Lifetime Value) is how much profit that customer generates over their whole relationship with the company. Comparing the two tells you whether growth spending actually makes sense.
🎯 Explain Like I'm Hired CAC is what you spend to win one new customer. LTV is what that customer is worth to you over their whole relationship. If LTV is bigger than CAC, each customer is eventually profitable, but "eventually" is doing a lot of work in that sentence, which is exactly what payback period measures. Example: a customer worth ₹6,000 in lifetime profit, acquired for ₹2,000, is a healthy 3-to-1 ratio on paper, but if it takes 18 months to earn back that ₹2,000, the company needs enough cash on hand to survive 18 months of upfront losses per customer before the model actually pays off. A 2-month payback on the same 3-to-1 ratio is a much safer bet.
LTV = Average revenue per customer × Gross margin % × Average customer lifespan
CAC = Total sales & marketing spend / Number of new customers acquired
Payback period = CAC / (Monthly revenue per customer × Gross margin %)
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