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← Statistics glossary

payback period

Also called: payback, CAC payback, CAC payback period

How long until a cohort's cumulative gross profit per user covers its acquisition cost.

The payback period is the age at which a cohort has earned back what it cost to acquire. On the LTV curve it's the point where cumulative gross profit per user crosses the CAC line:

payback month=min⁡{ t:LTVt≥CAC }\text{payback month} = \min \{\, t : \text{LTV}_t \ge \text{CAC} \,\}

Both sides must use the same denominator: LTV per install against cost per install, or LTV per payer against CAC per payer. If the curve crosses the line partway through a month, you can interpolate linearly within that month.

Payback matters because it's about cash and risk, not just profitability. A channel with a great 24-month LTV but a 20-month payback ties up money for almost two years, and the forecast for months 13–24 is the least reliable part. Many consumer subscription apps set a payback target (for example, "within 6 or 12 months") and cut channels that miss it, even if their projected LTV looks fine.

The subscription-business shortcut divides CAC by monthly gross profit per customer. It ignores churn, so it's always too optimistic for a consumer app: it assumes every payer stays until the cost is covered. Two more details change the answer: yearly plans paid upfront shorten cash payback, while refunds and cancellations before renewal can lengthen it; and a cohort's payback should be read by channel, because blending a free channel into it makes paid spend look faster to recover.

Example

Halves paid social in June: CPI $2.50. Cumulative gross profit per install of that cohort:

Month
1
2
3
4
5
6
7
Added in the month
$0.60
$0.45
$0.40
$0.35
$0.30
$0.28
$0.24
Cumulative
$0.60
$1.05
$1.45
$1.80
$2.10
$2.38
$2.62

The curve is below $2.50 at the end of month 6 ($2.38) and above it at the end of month 7 ($2.62). Within month 7 the cohort still needs $2.50 − $2.38 = $0.12 of the $0.24 it earns that month: 0.12 ÷ 0.24 = 0.5. Payback ≈ 6.5 months.

If Halves' target is payback within 6 months, this channel misses it by about two weeks. Theo can either lower CPI to at most $2.38 (the month-6 value) or improve early monetization, for example by showing the paywall at a better moment.

Common mistakes

  • Different denominators. LTV per payer against cost per install gives a payback that's far too short.
  • Using the churn-free shortcut. CAC ÷ monthly profit per customer assumes nobody leaves; read the cohort curve instead.
  • Revenue instead of gross profit. The store commission alone can add months to the real payback.
  • Blended cohorts. Organic and invite users with zero cost make a paid channel look like it pays back faster.
  • Confusing cash and revenue. Yearly plans bring cash early; refunds and non-renewals take some of it back later.