The customer lifetime value and acquisition cost calculator

Customer lifetime value (LTV) estimates the profit a customer brings over their relationship with the brand; customer acquisition cost (CAC) is what it costs to win one. The calculator multiplies order value, orders a year, gross margin and expected years to give a simple, undiscounted LTV; divides it by CAC to give the ratio; and divides CAC by the monthly gross profit a customer brings to give the payback period in months. The terms are in the glossary: LTV and CAC.

The idea that customers are assets with a value comes from marketing science. In "Valuing Customers", published in the Journal of Marketing Research in 2004, Sunil Gupta, Donald Lehmann and Jennifer Ames Stuart defined the value of a customer to a firm as the expected sum of discounted future earnings, based on assumptions about retention and profit margin, and showed that valuing customers makes it possible to value whole firms, including fast-growing firms with negative earnings¹. The paper won the 2009 William F. O'Dell Award for the Journal of Marketing Research article with the most significant long-term contribution². Kotler and Keller's Marketing Management teaches customer lifetime value as part of building customer relationships³, and Knowledge at Wharton has written about what customers are really worth⁴.

The calculator uses the simplest form, without discounting and with an average lifetime instead of a retention model, so that anyone can use it in a meeting. Gupta, Lehmann and Stuart's full method discounts future earnings and models retention explicitly¹.

1. Order value the average spend per order, from your own sales data.
2. Orders a year the average purchase frequency of a retained customer.
3. Gross margin revenue minus direct costs, as a percentage; use the product margin, not the company's net margin.
4. Years how long the average customer stays; for subscriptions, roughly one divided by the yearly churn rate.
5. Acquisition cost total acquisition spend in a period divided by new customers won in it; include media, offers and sales costs.

Illustrative figures for the fictional Ourika Roasters; not benchmarks.

An order value of 30, six orders a year, a gross margin of 40% and three years give a lifetime value of 216. With an acquisition cost of 60, the ratio is 3.6 and a new subscriber pays back their acquisition cost in about 10 months. The team then runs the same numbers for subscribers won in cafés and for those won through paid social, and moves budget towards the source with the better ratio while watching that its volume holds.

• Revenue instead of margin It inflates the value by the cost of goods.
• Averaging everything Cohorts and channels differ; the average hides where value is made.
• Undercounting acquisition cost Offers, sales time and agency fees are acquisition costs too.
• Treating the ratio as a target to maximise Cutting acquisition spend raises the ratio and can shrink the business.
• Forgetting discounting For long lifetimes, money later is worth less than money now¹.

• Gupta, Lehmann and Stuart, "Valuing Customers"¹, and the O'Dell Award².
• Kotler and Keller on customer lifetime value³; Knowledge at Wharton⁴.
• On IMC Report: CRM and loyalty.