Payback period calculator

Customer acquisition cost is the fully loaded figure — media plus the agency fees, salaries, production and commissions that went into winning the customer. Using a media-only number here produces a payback that is shorter than the truth by whatever the rest of the acquisition machine costs.

Revenue per customer per month is what one customer produces in an average month. For a subscription this is the plan price. For a business with irregular purchases it is annual revenue per customer divided by twelve, which is less precise and still answers the question, because the question is about cash over months rather than about any single order.

Gross margin is the share of that revenue the business keeps after delivering the product or the service. It is required, because revenue does not repay an acquisition cost — the profit inside it does.

Monthly gross profit per customer is the repayment instalment. At 60 of monthly revenue and a 50 per cent margin, it is 30 a month.

Months to pay back divides the acquisition cost by that instalment. At 240 of acquisition cost, eight months.

Gross profit after twelve months is what the customer has actually left the business by the end of the first year, acquisition cost included: twelve instalments of 30 is 360, less the 240 they cost, is 120. That third line is the one to show anybody who thinks in years rather than in ratios, because it is the amount of real money one customer produced in a period the business can plan around.

A ratio between lifetime value and acquisition cost tells you whether a customer is worth more than they cost. It says nothing about when.

Consider two businesses with identical ratios of four. One pays back in three months; the other in twenty. The first can grow as fast as demand allows, because each cohort funds the next one within a quarter. The second funds every new customer out of capital for nearly two years, and the faster it grows the more cash it consumes. Growth makes the first business stronger and the second more fragile, and no ratio distinguishes them.

This is also why payback is the number that decides how aggressive a business can be in the auction. A short payback means an acquisition cost increase is recovered quickly, so bidding up into more expensive audiences is a manageable risk. A long payback means the same increase is a multi-year commitment made on a forecast.

The calculation assumes the customer keeps buying at the same rate for as long as the payback takes. That assumption is the whole risk.

Churn. If a meaningful share of customers stop before the payback month, the blended payback across the cohort is longer than the arithmetic here — sometimes much longer — and in the extreme a payback that exceeds the average relationship never completes at all. Compare the months on this page with the share of your own customers still active at that month, and treat a large gap as the real result.

A flat instalment. Real revenue per customer changes over the relationship: some businesses see it fall as the novelty wears off, others see it rise as the customer expands. A flat monthly figure is a simplification, and it is conservative in one direction and generous in the other depending on which shape you have.

Averages across unlike cohorts. Customers acquired on a deep discount typically pay back more slowly than customers acquired at full price. One blended payback across both hides a segment that never repays.

Gross profit is not cash. Payment terms, refunds and the timing of stock purchases all sit between gross profit and money in the account. For a business with meaningful inventory, the cash payback is longer than the profit payback, and the difference is working capital.

Set a maximum payback the business can actually finance, and treat it as a constraint on acquisition rather than a metric to report. That number comes from the cash position, not from a convention: a business funding growth from its own trading has a shorter limit than one that has raised money for exactly this purpose, and both should write the limit down before a campaign is scaled rather than after.

Then shorten it where it can be shortened. Acquisition cost is one half of the fraction and the instalment is the other, and the second is usually neglected. An onboarding change that brings the second purchase forward, a higher-margin plan, an annual option paid up front: each shortens payback without winning a single additional auction. Charging annually rather than monthly is the most direct version of all, because it collects a year of instalments on day one and converts a cash problem into a pricing decision.

Finally, read this number beside the ratio rather than instead of it. The ratio decides whether a customer is worth acquiring. Payback decides how many of them the business can afford to acquire at once.