Codie Sanchez breaks down how to price subscriptions: multiply average monthly order value by gross margin by months retained to get lifetime value. If your LTV is $100, aim for customer acquisition cost under $20 to hit a 5:1 ratio.
Average order value per month × gross margin × number of months retained
$20 product × 50% gross margin × 10 months = $100 LTV
Greater than 5
$20 or less per customer
August 15, 2023
Really hard to figure out how to charge for things and how to decide if you're making money. What is one formula you use to simplify that for.
Subscription businesses, kind of the North Star financial metric is your lifetime value of a customer. So how much profit you make over the life of a customer divided by your cost to acquire that customer. So lifetime value is just your average order value per month, times your gross margin on that product, times your number of months that someone stays. So if you're a business that sells a $20 product and you have 50% gross margins and people stay for 10 months, your LTV would be $100. And so then you come up with what you can pay per customer based on this. And so there's like kind of different healthy ratios. As a bootstrap company, we had to have a really aggressive one, so we needed an LTV to CAC them greater than 5. In this math, that means we needed to pay $20 or less for a customer.
What we just saw here is how to charge for your products in order to make money.
