The four numbers behind every honest service practice
CAC — what it costs to sign one client
Customer acquisition cost is the all-in expense of producing one signed engagement. It includes ad spend, the loaded cost of any sales staff, software used in the sales process, and the founder's hours at a fully-loaded rate. Critically, it includes the cost of calls that did not close, divided across the calls that did. A practice that takes thirty calls to sign six clients with one £4,000-a-month appointment-setter in the loop is paying roughly £667 per signed client in setter cost alone, before any ad spend or founder time. Most early operators count CAC as a fraction of its true value, then wonder why their accounts run dry.
LTV — total gross profit a client produces
Lifetime value is not total revenue, it is total gross profit. The simple formula is monthly fee multiplied by gross margin percentage multiplied by average client tenure in months. A £1,500-per-month client at 60 per cent gross margin who stays fourteen months is worth £12,600 of LTV — not £21,000. The 60 per cent margin number is doing more work than people realise; small variations in margin produce large swings in LTV. This is why margin discipline matters more than headline price.
Payback period and contribution margin
Payback period is the months of contribution from one client needed to recover CAC, calculated as CAC divided by monthly contribution margin. Contribution margin is the monthly fee minus the direct variable cost of serving that one client. If acquiring a client costs £1,800 and they produce £900 of contribution per month, payback is two months — healthy. If costs rise and contribution slips, payback can stretch quickly. Self-funded practices generally need payback under six months because they have no venture cushion, and a churned client at month four becomes a recorded loss.
The AI-specific complication — usage-coupled cost
Unlike a marketing agency, an AI services practice has direct variable costs that are unusually fiddly: API tokens, telephony minutes, SMS sends, per-seat platform fees, and contractor delivery time. The complication is that these costs scale with how much a client uses the service, not with what the client pays. A heavy-volume client on a flat fee can have negative contribution margin while looking like a star account by revenue. Tiered pricing with usage caps, active per-client cost monitoring, and a willingness to renegotiate or exit unprofitable accounts are the only honest defences. A practice that watches revenue but not per-client cost discovers its worst margin clients far too late.
If you signed a client at £1,500 a month tomorrow, would you know whether you had just made money or lost it? Without the four numbers in this lesson, you cannot.