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Calculate CAC and LTV Without Complex Models

Calculate CAC and LTV Without Complex Models - Cosmopolitan Courier - Cosmopolitan Courier

The owner of a small skin care label showed me a single sticky note taped to her laptop: “Is this working?” Last month she spent on ads, sponsored a podcast, sent samples to a few creators and saw a bump in orders. But the bump was messy. Some buyers were returning customers. Some were friends-of-friends. The question behind the note was simple: what did it cost to get a new customer, and what was each customer worth over time?

You do not need a data team to answer that. You need a consistent way to count money out, customers in and the margin you keep. The methods below are intentionally plain. They trade precision for speed and repeatability, which is what you need to make decisions.

The cleanest path to CAC

Customer acquisition cost is the average marketing and sales spend required to win one new customer over a defined period.

Fast version

Use this when you need a number today.

CAC = total acquisition spend in period / number of new customers in same period

What to include in spend: paid ads, creator fees, referral payouts, agency fees, sponsorships and any discounts that are clearly acquisition incentives. Keep the window tight, like a single month or quarter, and be consistent.

What to count as new customers: first ever purchasers in that window. If your platform shows “first-time customers,” use that. For a service business, count first signed clients.

Grounded version

Improve the fast version without making it complicated.

  • Make two CACs. Media-only CAC (just ad and promo spend) and fully loaded CAC (media plus salaries for acquisition roles, software used for acquisition, creative production). The first tells you channel efficiency. The second tells you true cost to scale.
  • Match timing. Use the same date window for spend and new customers. If your ads take a week to convert, use a rolling window or accept the lag and keep it consistent each month.
  • Exclude retention and admin. Email to existing customers, support, printing, general overhead and rent sit outside acquisition.
  • Net out taxes and refunds. Track spend and sales net of GST and account for returns so you are not flattering the numbers.

LTV without a complex model

Lifetime value is the gross profit you expect from a typical customer over the life of their relationship with you. The key is to stay on profit, not revenue.

Fast version

If your business sells repeat purchases but you do not have granular data yet:

LTV = average order value x gross margin % x orders per customer per year x average customer lifespan (years)

Estimate orders per year and lifespan from your own history. If you are too new for that, use conservative assumptions, then tighten them each month.

For a subscription, keep it even simpler:

LTV = average monthly gross profit per active customer x average tenure in months

Build it from your sales history

When you have a few months of orders, build LTV from actual behaviour.

  • Average order value (AOV). Take total revenue from customers’ first 12 months, divided by number of orders. Exclude GST and shipping charged to customers.
  • Gross margin. Revenue minus cost of goods sold, as a percentage. Include packaging and fulfilment costs you pay.
  • Order frequency. For customers acquired in a given month, count how many orders they placed over the next 12 months, on average.
  • Retention horizon. If most customers fade after about 18 months, use 1.5 years. If you do not know, start with one year and expand as you collect more months of data.

Combine them using the same formula. The important part is consistency. If you measure over 12 months, compare CAC taken in the month of acquisition to LTV expected over that 12-month horizon.

Make the two numbers talk

CAC tells you the cost to win a customer. LTV tells you the profit that customer is likely to generate. The gap between them is the room you have to operate. You want LTV comfortably higher than CAC so you can pay the bills, invest in growth and handle the surprises that always show up.

Two quick checks:

  • Payback period. How many months of gross profit does it take to earn back CAC? Faster payback lowers cash strain. If it takes a year to recover, make sure you can fund the gap.
  • Channel comparison. Calculate CAC by channel. If search ads deliver a lower CAC than social, shift budget and recheck next month.

Common traps to avoid

  • Counting returning customers as new. Use first purchase date to define new customers. Everyone else belongs in retention analysis, not acquisition.
  • Forgetting discounts. If you offer 20 percent off to first buyers, that discount reduces gross profit on the first order. Capture it in LTV, not CAC.
  • Attribution stretch. Do not claim every sale touched by an ad as acquired by that ad. Keep your window honest and compare like with like each month.
  • Margin blindness. Revenue growth is nice. Only margin pays CAC back. Always multiply by gross margin before calling something value.

A short worked example

Imagine a Pilates studio runs a month-long push: digital ads, local flyers and a new-student offer.

  • Acquisition spend: ads 6,000, flyers 800, intro offer gift cards 1,200. Total 8,000.
  • New customers signed in the month: 200.

Media-only CAC might be 6,800 divided by 200 equals 34. Fully loaded CAC adds staff hours and design help, say another 1,200, so 8,000 divided by 200 equals 40.

Now LTV. The studio’s new-student cohort over the next year shows:

  • Average class pack sale after trial: 90.
  • Gross margin after instructor pay and rent allocation: 60 percent.
  • Average orders in first year: 3.
  • Beyond 12 months, most switch to casual visits. The studio uses a 1.5-year horizon for new students.

LTV equals 90 x 0.6 x 3 x 1.5. That is 243 in gross profit over 18 months. With a fully loaded CAC of 40, there is room for overhead, cash timing and some error. Payback period is roughly the first two orders.

Keep it simple, keep it consistent and keep it current. Accuracy comes from repetition, not complexity.

Keep it current

Update CAC and LTV monthly. Use the same spreadsheet, the same inputs and the same definitions. Add one modest improvement at a time. You might start by splitting CAC by channel. Next month, tighten LTV by using actual repeat rates for cohorts acquired three months ago. The month after, add refunds and returns. Small steps maintain comparability and will make your decisions sharper.

What to write in your sheet

  • Inputs: ad spend, promo spend, agency fees, acquisition salaries, creative costs, number of new customers, revenue, cost of goods sold, refunds, taxes collected, orders per customer, active months.
  • Outputs: media-only CAC, fully loaded CAC, LTV over your chosen horizon, payback period, LTV to CAC comparison, CAC by channel.

When the sticky note asks again, you will have an answer you trust. Not perfect. Just reliable enough to move budget with confidence, pause a channel that is not paying back or lean into what clearly is.

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Unit Economics Explained for Service Businesses

Unit Economics Explained for Service Businesses - Cosmopolitan Courier - Cosmopolitan Courier

The studio manager had two emails open. One was a dream client asking for a small discount to start next week. The other was a loyal account wanting an urgent change at the weekend. Both looked like revenue. Neither was obviously profit. Without a clear unit view of the numbers, choices like these rest on instinct and coffee. With it, they become straightforward.

Start by choosing your unit

In a service business, a unit is the simplest repeatable chunk of value you sell. Pick one that matches how work is scoped and scheduled. That might be a client month for a subscription, a project, a billable hour, a seat in a class, a visit, or a room night if you run accommodation.

Good units share three traits. They are consistent, so you can compare performance over time. They are measurable, so you can count inputs like time and materials. They are close to decisions, so the person pricing or scheduling can use them in the moment. If you run mixed work, keep two views. For example, track project units for bespoke builds and client month units for retainers.

The core equation: contribution per unit

Unit economics asks a simple question. For each unit you sell, how much money is left after the direct cost to deliver it. That leftover is contribution. It is the cash that pays for overheads like rent, software, and the owner’s salary. If contribution is consistently positive, capacity and pricing can be tuned. If contribution swings or sits near zero, the model needs work.

The formula is plain:

  • Revenue per unit minus
  • Variable delivery cost per unit equals
  • Contribution per unit.

Variable delivery costs are the costs that rise when you deliver one more unit. In services, labour is the main one. Add any materials, travel, specialist contractors, payment fees, and platform per use fees. Treat overheads that do not change with one more unit as fixed, for example base software subscriptions or rent.

Count labour properly

Underestimating labour sinks contribution. Use an effective hourly cost, not the wage alone. Load it with super, leave, payroll tax, training, equipment, and a fair allowance for non billable time. Few people bill eight hours a day. Set a realistic utilisation target, then price to it. If a designer costs you 45 dollars an hour all in and bills 70 per cent of their time, their effective delivery cost per billable hour is higher than 45. Build that into the unit.

Scope creep also lives here. If your unit is a project, define what is inside and how change requests are priced. If it is a client month, set a clear service level. Every unpriced extra email or extra round of edits chips away at contribution.

Acquisition, retention and lifetime value

Contribution per unit tells you what a sale is worth before you count the cost of getting and keeping the client. Customer acquisition cost and retention complete the picture.

  • Customer acquisition cost is all in. Include ads and software tied to lead generation, commissions or referral fees, as well as sales time. Founder hours count, even if they are not on a payslip. Put a fair hourly rate on them.
  • Retention and churn matter because most services depend on repeat units. A client who stays for six months at a healthy contribution is very different to a one off job.
  • Lifetime value is the contribution you expect to earn across the average relationship, minus acquisition. The payback period is how many units it takes for contribution to cover acquisition. Shorter is safer, especially when cash is tight.

For project work, think in seasons. If you win a client with a cheap first job, do you reliably win the second, larger job. If not, the initial discount may never pay back. For subscriptions or memberships, measure churn monthly and review the moments where clients leave, for example after onboarding or at month three.

Cancellations and no shows

Services are exposed to schedule volatility. Track cancellation rates and the true cost of a short notice no show. Many operators accept them as part of life. They are usually a fixable leak through better confirmation, prepayment, or waitlists. If your unit is a class or appointment, contribution depends on seat fill and cancellation discipline.

Capacity turns economics into decisions

Unit economics only becomes useful when it meets your calendar. Two simple questions bring it to life. First, is the next unit profitable on a contribution basis. Second, what does it do to capacity this week or month. If you have idle capacity, a lower contribution job can be rational. If you are at or near a utilisation target, protect high contribution work and raise prices for urgent or complex work.

Watch the bridge between sales promises and delivery capacity. Long onboarding with senior staff, heavy handovers, and repeated context switching inflate delivery cost. Tighten handoffs, standardise templates, and batch work where possible. Those moves raise contribution without raising price.

A quick example

Imagine a social media studio that sells a client month unit for a fixed fee. Direct delivery includes a strategist and a content producer. Loaded costs work out to 60 dollars an hour for the strategist and 40 for the producer. A typical month includes 8 hours of strategy and 20 of production. Payment processing and stock media add a small cost per client.

Revenue per client month might be 2,000. Variable delivery cost is 8 times 60 plus 20 times 40, plus say 50 in fees and media. Contribution per client month is the difference. If the studio spends 800 to win a client, the payback period is the number of months it takes for contribution to cover that 800. If clients stay for an average of 7 months, the lifetime value is contribution per month times 7, minus acquisition.

Now test sensitivity. What happens if scope creep adds two unplanned hours a week. What if churn rises after month two. Small changes that feel harmless often collapse payback and cut lifetime value in half.

Build a one page worksheet

You do not need complex software to start. A simple sheet does the job if it is honest and updated.

  • Define your primary unit for each service line. Project, client month, seat, visit, or hour.
  • List the roles that touch the unit and their loaded hourly costs. Add typical hours by role per unit.
  • Add per unit materials, contractor, travel and payment costs.
  • Enter revenue per unit and calculate contribution. Add a section for acquisition cost and expected retention.
  • Track real outcomes weekly. Update actual hours, cancellations, scope changes, and churn. Compare plan to reality.

Common red flags, simple fixes

Chronic discounting, especially on first jobs, without a clear path to profitable follow on work. Fix by using a smaller, well defined starter unit at full price.

Overtime that props up deadlines. Fix by rescoping to match capacity and pricing urgent work higher. Overtime is a hidden variable cost that erodes contribution fast.

Onboarding that requires your most senior people for long stretches. Fix by creating repeatable assets, templates and training so mid level staff carry more of the unit.

An ill chosen unit. If a project varies wildly in effort, adopt a milestone or sprint unit. If client months swing due to seasonality, add a usage tier or cap on included work.

Make it a habit

Unit economics tells you what to sell, what to say no to, and what to change. Keep it close to the front line. Review three numbers every Friday. Contribution per unit this week, payback on new clients signed, and utilisation against your target. If they move the right way, keep going. If not, adjust scope, price, or process before the next week fills up.

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