Fully loaded CAC, or none at all
Customer acquisition cost is total sales and marketing spend in a period divided by new customers acquired in that period. Fully loaded means salaries, commissions, tooling and content — not just paid media. Excluding headcount typically understates CAC by two to four times in a sales-led business.
Where the sales cycle is long, lag the numerator: spend in Q1 acquires customers in Q2. Ignoring the lag flatters a company that has just cut marketing and penalises one that has just scaled it.
LTV is gross margin, discounted, with real churn
Lifetime value uses gross profit, not revenue. A business with 55% gross margin and a $1,000 annual contract contributes $550 a year, not $1,000. Then apply the observed retention curve rather than a single average churn rate — early-cohort churn is almost always higher than blended churn suggests.
For companies under three years old, cap the horizon at 36 months. Extrapolating a lifetime beyond the observed data produces a number that describes an assumption, not a customer base.
| Metric | Honest definition | Common distortion |
|---|---|---|
| CAC | Fully loaded S&M ÷ new customers, lagged | Paid media only |
| LTV | Gross profit × retained months, discounted | Revenue × 1/churn, uncapped |
| Payback | Months until cumulative gross profit = CAC | Revenue-based payback |
| NRR | Expansion − churn − contraction on a fixed cohort | New logos counted as expansion |
Payback period is the metric that constrains growth
LTV:CAC describes eventual profitability; payback describes how much cash a growth plan consumes before it returns any. A company with a strong ratio and a 30-month payback still needs a large balance sheet to grow, because each new customer is a 30-month loan.
Under 12 months is comfortable for SMB motions, 12–24 months is normal for mid-market, and beyond 24 months growth is effectively a financing decision rather than an operating one.
What to check before trusting any of it
- Cohort table by signup month, not a blended average
- Gross margin after hosting, support and third-party fees
- Whether expansion revenue is netted against churn or double-counted
- Sample size — ratios computed on fewer than 50 customers are anecdotes
Part of a guide
Startup financials: unit economics, runway and valuation
A guide to the financial questions that decide early-stage outcomes: CAC, LTV and payback, burn rate and runway, how much runway to hold, and how pre-revenue companies get valued.