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CAC, LTV and payback period
7 minutes · 9 steps · workout 2 of 6 in this module
What you'll be able to do
By the end of this workout, you'll be able to calculate customer acquisition cost, margin-based lifetime value and payback period, and use the LTV:CAC ratio to decide which channel deserves more budget.
A first look: Warm-up: what does one new customer really cost?
CAC (customer acquisition cost) is everything you spent to win new customers, divided by the number of new customers. Everything means ad spend plus the agency fee, the tools, the creative production. CAC is not the same as CPA from your ad platform. CPA counts every purchase, including people who were already customers. CAC counts only new customers and all the costs. That's why CAC is usually higher than the CPA Meta or Google shows you.
Example: Corner Coffee's app campaign: Meta reports a $9 CPA. But half the buyers were existing customers, and the agency fee isn't in the platform number. The real CAC comes out at $22.
What this workout covers
- Warm-up: what does one new customer really cost?
- LTV, this time with margin
- Payback period: how many months until the cash comes back
- Case: Which channel gets the extra $2,000?
A question from this workout: Which channel gets the extra $2,000?
Northpack has $2,000 of extra budget for next month. The team compared its two acquisition channels over the last quarter. TikTok brings younger buyers who mostly buy one cheap item and don't return. Google Search brings people looking for a laptop backpack, and many come back for accessories.
- TikTok CAC
- $20
- TikTok margin-based LTV
- $40
- Google Search CAC
- $50
- Google Search margin-based LTV
- $250
Where does the extra $2,000 go?
- TikTok, because $20 is the cheapest way to get a customer
- Google Search, because LTV:CAC is 5 there versus 2 on TikTok
- Split it evenly to keep both channels happy
- Neither, until CAC on both channels drops below $15
Pick your answer first, then open the reasoning below.
Show the answer and the reasoning
Answer: B. Google Search, because LTV:CAC is 5 there versus 2 on TikTok
Compute the ratios: TikTok $40 ÷ $20 = 2, Google $250 ÷ $50 = 5. Every dollar on Google brings back more than twice as much gross profit over time. The most common mistake is picking the cheapest CAC. A cheap customer who never returns is more expensive than an expensive one who does.
The other steps work the same way: you decide first, then see why each option is right or wrong.
How you practice here
- 3 short concept cards
- 1 multiple-choice question
- 1 campaign case with real-looking numbers
- 1 put-in-order exercise
- 3 guided calculations
Part of the module: Marketing Metrics and KPIs
Knowing which numbers really matter: choosing KPIs, unit economics, profitability and setting realistic targets.
More workouts in this module
- Metric or KPI? Numbers tied to a goal
- ROAS is not enough: profit margin and break-even ROAS
- The North Star metric and the metric tree
- Vanity metrics: the likes and followers trap
- Setting realistic targets: past data, seasonality and budget
Programs that include this workout