Pipeline Velocity, CAC Payback and LTV: Formulas, Examples

The short answer: pipeline velocity is (qualified opportunities x average deal value x win rate) / sales cycle length in days, and it gives revenue per day. CAC payback is CAC / (monthly revenue per account x gross margin), and it gives months. LTV is (monthly revenue per account x gross margin) / monthly churn rate, and it gives the gross profit a customer is expected to produce. The formulas are short. The work is agreeing what goes into each input, because two teams can start from the same data and report different numbers.

Below are the formulas, worked examples at mid-market and enterprise scale, benchmarks with their sources, and what each formula leaves out. Every figure in the examples is invented. For layout and review cadence, see the one-page CMO dashboard.

The three formulas

CAC (customer acquisition cost) is sales and marketing cost in a period divided by the new customers won in that period. Salesforce and HubSpot publish the pipeline formula as sales velocity (Salesforce, HubSpot). The CAC, payback and LTV formulas follow David Skok's SaaS metrics definitions.

Two invented companies

Company M is a mid-market business with accounts worth $24,000 a year. There is no standard contract-value cut-off for mid-market, so the label is mine. Company E sells to enterprises. Neither exists.

Pipeline velocity

Pipeline velocity = (number of opportunities x average deal value x win rate) / sales cycle length in days

Define each input once and write it down. Opportunities are qualified opportunities that are open today. Keep the qualification rule fixed, or velocity moves while nothing changes in the business. Deal value is the first-year value of won deals. Win rate is deals won divided by opportunities, measured on closed opportunities. Cycle length is the average number of days from a qualified opportunity to closed-won. Use days, and the answer is revenue per day.

• Company M: 100 x $24,000 x 0.20 / 60 = $480,000 / 60 = $8,000 per day
• Company E: 40 x $250,000 x 0.25 / 270 = $2,500,000 / 270 = $9,259 per day

The inputs multiply and divide, so a 10 percent gain in opportunities, deal value or win rate lifts velocity by 10 percent, and a 10 percent shorter cycle lifts it by 11.1 percent. For Company M, 54 days instead of 60 gives $480,000 / 54 = $8,889. Start with the cheapest lever, then check what it does to the others: more volume can lower the win rate, and closing faster by discounting lowers the deal value.

It describes the open pipeline. It is not a forecast, because it assumes the win rate and cycle length hold and ignores slippage and seasonality. Calculate it per segment, since a blend of small and large deals hides both, and look at median deal value next to the mean.

CAC payback

CAC payback (months) = CAC / (monthly revenue per account x gross margin)

• Company M: $10,000 / ($2,000 x 0.80) = $10,000 / $1,600 = 6.25 months
• Company E: $250,000 / 12 = $20,833 of revenue a month. At a 75% gross margin that is $15,625 of gross profit. $300,000 / $15,625 = 19.2 months

Fix the cost scope before you compare. Skok's CAC is sales and marketing expense divided by new customers. Benchmarkit measures the months needed to pay back the sales and marketing expense of new customers, adjusted for gross margin. Bessemer also counts the part of customer success that ties to renewal and upsell. With a long sales cycle, match cost to the period that produced the customers: Company E's wins this quarter were paid for by spend from about nine months ago.

Bessemer's reason for the longer enterprise target is that contract values are higher and enterprise churn is the lowest, which lets enterprise-focused companies support longer payback periods. By that standard, Company M's 6.25 months is inside every target, and Company E's 19.2 months is inside the enterprise target and outside the mid-market one. The figures describe subscription software, not retail or other models with different margins and buying patterns.

LTV

LTV = (monthly revenue per account x gross margin) / monthly churn rate

The same formula reads as monthly gross profit x expected lifetime in months, where lifetime = 1 / monthly churn.

• Company M: $2,000 x 0.80 = $1,600 of gross profit a month. Churn of 2% means a lifetime of 1 / 0.02 = 50 months. LTV = $1,600 / 0.02 = $80,000, and LTV to CAC = $80,000 / $10,000 = 8.0
• Company E: $250,000 x 0.75 = $187,500 of gross profit a year. Churn of 10% means a lifetime of 10 years. LTV = $187,500 / 0.10 = $1,875,000, and LTV to CAC = $1,875,000 / $300,000 = 6.25

Use gross profit, not revenue. Company M's revenue-based LTV is $2,000 / 0.02 = $100,000, which is 25 percent higher.

The simple formula counts every future month, however distant. Here is a five-year view of the same companies, with the same churn, no expansion and customers leaving at the end of each period. Company E: $187,500 x (1 + 0.9 + 0.9^2 + 0.9^3 + 0.9^4) = $187,500 x 4.0951 = $767,831. Company M: $1,600 x (1 - 0.98^60) / 0.02 = $1,600 x 35.1224 = $56,196. This is my own illustration of the horizon effect, not a standard formula.

Skok says the best SaaS businesses have an LTV to CAC ratio above 3, sometimes 7 or 8, and stresses that these are only guidelines (SaaS Metrics 2.0). On the simple formula Company E clears 3 by a wide margin. On the five-year view it does not. State the method and the horizon next to every LTV figure.

What the simple formula ignores:

• Expansion and contraction. It assumes revenue per account stays flat. Net revenue retention captures growth and shrinkage in existing accounts: SaaS Capital defines it as the monthly recurring revenue now from customers who were customers a year ago, divided by their recurring revenue a year ago. Skok's definitions page gives a separate formula for steadily growing accounts.
• Multi-year contracts. Constant monthly churn assumes customers can leave at any time. Under a three-year contract they leave at renewal, so use retention at each renewal date.
• Time value of money. Distant gross profit is added at face value. Discounting lowers LTV.
• Cost to serve and retain. Gross margin as booked can leave out onboarding, support and account management.
• Constant churn. It treats every month alike. At low churn the answer explodes: 2% monthly is a 50-month lifetime, 0.5% is 200 months. Cap the horizon, as the five-year view does, and compute it per segment, because blended churn hides the customers who leave fastest.

The LTV:CAC calculator on this site takes order value, gross margin, orders per year, customer lifespan and CAC, and returns LTV, the ratio and CAC payback in months. It uses a fixed lifespan, not a churn rate. For Company M, enter an order value of 2,000, a margin of 80, 12 orders a year, a lifespan of 4.17 years (50 months) and a CAC of 10,000. It returns about 80,000, a ratio of 8.0 and a payback of 6.3 months, which is 6.25 rounded. The fields show euro signs, but the arithmetic does not depend on the currency.

For the economics of retention, see Amy Gallo's The Value of Keeping the Right Customers (Harvard Business Review, 29 October 2014). Channel-level CAC depends on how you credit marketing for each customer: see marketing attribution in the enterprise. Whatever you publish, state the cost scope behind CAC, the LTV method and horizon, and the segment.

Frequently Asked Questions

What are the most important marketing KPIs?

For a business that sells subscriptions or contracts to identified customers, I would start with pipeline velocity, CAC payback and LTV. Together they show how fast revenue is coming, how quickly a customer repays the cost of winning them, and what a customer is worth. They do not fit a business that sells mainly through retailers and never sees the buyer. The CMO dashboard post lists consumer equivalents.

How do I calculate pipeline velocity?

Multiply qualified opportunities by average deal value and win rate, then divide by the sales cycle length in days. With 100 opportunities, a $24,000 deal value, a 20 percent win rate and a 60-day cycle: 100 x $24,000 x 0.20 / 60 = $8,000 per day.

What is a good CAC payback period?

It depends on the segment and the contract value. David Skok's original guideline was 12 months or less. Bessemer's targets for cloud companies are under 12 months for SMB, under 18 for mid-market and under 24 for enterprise. Treat them as targets for subscription software, and state which costs your CAC includes.

How can I improve LTV?

Change one input at a time and see which moves LTV most. In Company M, cutting monthly churn by a quarter, from 2% to 1.5%, lifts LTV from $80,000 to $106,667, up 33 percent. Raising revenue per account by a quarter lifts it by 25 percent, and raising gross margin from 80% to 85% lifts it by 6 percent. Churn comes out as the strongest lever here because it sits in the denominator, where a smaller number raises the result by more. Check what each change costs before you choose.