Time to Break Even
Lower is better
How is Time to Break Even calculated?
For this calculation, gather a cohort of users or customers within a given period of time. Usually, this time period is monthly, quarterly, or yearly. Take the variable costs for that cohort of users and subtract from the average revenue per user for the same cohort. Variable costs can be any cost related to building and promoting the product. This can be engineering or advertising spend and will most likely be the largest number in this equation. Take the result of the subtraction and divide that from the fixed costs for the cohort. Fixed costs do not change as sales increase; typically, things like rent are considered fixed.
The result will be based on the time period that you initially used. For example, if you sampled users from the past month and arrived at a time to break even of two, your time to break even will be 2 months.
What is Time to Break Even?
Time to break even helps you calculate how long it will take for your profits from a customer to equal the cost to initially acquire the customer.
Why is Time to Break Even important?
Time to break even helps inform your business of the length of sales and operations cycles. If you have a longer time to break even, you may want to ensure that your LTV offsets that cost.
Start tracking your Time to Break Even
Create a KPI for Time to Break Even to monitor it over time and an OKR to track your impact against it in Commonality.
Lifetime Value (LTV)
Ensure that you're delivering value that customers are willing to pay for by measuring the average revenue that a customer will generate throughout their lifespan as a customer.
Customer Acquisition Cost (CAC)
Ensure you're staying lean and scaling efficiently by measuring how much it costs to acquire a single customer.
Lifetime Value to Customer Acquisition Cost (LTV/CAC)
Measure this leading indicator of prediciting future growth, customer profitability, and the efficiency of your sales and marketing efforts.