Model Ltv Cac

Model LTV:CAC

Purpose

Help teams calculate, interpret, and improve the LTV:CAC ratio — the foundational unit economics metric that determines whether growth is creating or destroying value.

Skill type

Conceptual skill with calculation-aware components

Use this skill when

• The team doesn't know if growth is economically sustainable
• LTV or CAC metrics exist but aren't being compared or interpreted correctly
• A pricing or acquisition model change needs impact assessment on LTV:CAC
• An investor or leadership asks about unit economics

Do not use this skill when

• The goal is general revenue forecasting (use run-forecasting-scenarios)
• The goal is pricing structure (use support-pricing-packaging)

Required inputs

• Cohort-level gross profit data over time (preferred), OR:
  • Average revenue per customer (monthly or annual)
  • Gross margin
  • Churn rate (for the simplified formula — subscription models only)
• CAC estimate (total S&M spend and new customers acquired)

Optional inputs

• CAC breakdown by channel
• LTV by segment or cohort
• Payback period data
• Industry benchmarks
• Early cohort data for LTV prediction

Upstream context

Works best when:

• Revenue model is defined
• Cohort-level data or churn data exists
• Gross margin is known (not assumed)

Downstream handoff

Output can feed:

• build-business-case (LTV:CAC is a core business case input)
• align-revenue-strategy (unit economics informs revenue strategy)
• strategize-channel-campaigns (CAC by channel feeds channel strategy)

Instructions

1. Determine available data: cohort-level gross profit data, or aggregate metrics (ARPU, churn, margin).
2. Calculate LTV using the appropriate method:
   • Cohort method (preferred): calculate cumulative gross profit per user over time from cohort data. Present LTV at specific time horizons (month 6, month 12, etc.).
   • Simplified formula (subscription models with stable churn only): (ARPU × Gross Margin) ÷ Churn Rate. State all assumptions. Flag that this is an estimate.
3. Calculate CAC: Total Sales and Marketing Spend ÷ New Customers Acquired.
4. Calculate LTV:CAC ratio and payback period. Always specify the LTV time horizon used.
5. Break down CAC by channel if data allows.
6. Assess the ratio against benchmarks (typically: >3x LTV:CAC is healthy; <12 month payback is strong).
7. Identify the biggest levers to improve the ratio.
8. If early cohort data is available, describe how to predict long-term LTV from short-term signals.

Output

Provide:

• LTV calculation with method stated (cohort or simplified), inputs, and time horizon
• CAC calculation with inputs
• LTV:CAC ratio and payback period
• Benchmark comparison
• Ratio interpretation (healthy / marginal / unsustainable)
• CAC by channel (if available)
• Top improvement levers with estimated impact
• Key assumptions and their sensitivity
• Recommendation for which data to collect if inputs are incomplete

Risks / caveats

• LTV based on revenue instead of gross profit overstates customer value — always use gross profit
• The simplified formula (ARPU × Margin / Churn) assumes constant churn, which rarely holds — prefer cohort-based LTV when data is available
• "Lifetime = 1 / Churn" is a rough estimate, not a measured quantity — do not treat it as precise
• CAC must include all S&M costs, not just paid advertising
• LTV:CAC above 10x sometimes signals underinvestment in growth, not just efficiency
• LTV without a specified time horizon is meaningless — always state the period