How Much Can You Lose on a New Customer? CAC-to-LTV for Subscription Brands
If you're running a subscription or consumables brand and think losing money on your first order is a red flag, this episode will change how you see it.
In this mini episode of The Free to Grow CFO Podcast, Jon Blair breaks down the third installment of FTG's Growth Marketing Game Playbook: the High LTV Game. Jon explains why brands with strong LTV velocity — think supplements and consumables — can and often should run a controlled first-order loss, as long as CAC payback stays within a 3-6 month window (3-4 months ideal). He walks through the primary scaling constraint (CAC payback expanding faster than LTV can keep up), why running out of subscription inventory can collapse the whole model, and why brands selling on both Amazon and Shopify need a combined cohort model to avoid misreading which channel is actually profitable.
If you're scaling a subscription brand and want a framework for how much first-order loss you can safely afford, this one's for you.
Key Takeaways
A controlled first-order loss is the right strategy when LTV velocity supports CAC payback within 3-6 months.
The primary risk in this game is CAC payback window expansion outpacing your LTV velocity.
Running out of subscription inventory can break the entire high-LTV growth model.
Transcript
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00:15 Introduction
00:36 Understanding the Growth Marketing Game Framework
01:25 Exploring the High LTV Game
03:12 Scaling the High LTV Game
05:57 Key Strategies for High LTV Brands
Jon Blair (00:15)
Hey everyone, welcome back to another mini episode of the Free To Grow CFO Podcast, where I break down one key concept that will help your brand increase profit and cashflow as you scale.
I'm your host, Jon Blair, founder of Free to Grow CFO. We are the go-to outsource finance and accounting firm for eight and nine-figure DTC brands.
Okay, so if you've been listening to our mini episodes for the last several weeks, you've heard about this unique framework that you can only find at Free to Grow CFO. That's our proprietary growth marketing game playbook. so what is that? It's a framework we've developed over the years to help brands scale ad spend profitably. Here's the framework in a nutshell. One, identify the growth marketing game that you're playing.
Two, set the first order profitability rule that goes along with that game. Step three, define your game scaling constraint. And step four, deploy the growth marketing playbook options that are available to that game. So I've already talked about the apparel game and what we call the new customer dominant game. Today we're gonna talk about the high LTV game.
So what is the high LTV game?
The high LTV game is the game played by brands that sell consumables, think supplements. This brand is characterized by LTV that can support CAC payback within a three to six month period, although three to four months is ideal. So this is a brand that has sufficient LTV velocity, meaning it's coming in fast enough every single month on a cohort basis that you can lose money on the first order but get to break even by month three or four. So the first order profitability rule for a high LTV brand is a controlled loss. You can lose money and oftentimes should lose money on a new customer, but it needs to be controlled. Why? Because the primary scaling constraint is the CAC payback window expanding. CAC payback window expansion means that you maybe go from a three month break even to a four month, five month, six month, seven month as you scale. Why? Because as CAC increases, LTV velocity is not keeping up enough to keep break even at month three. Now I'm not saying that your break even point has to stay at month three as you scale. That's a whole lot of nuance. It's a whole lot more that we have to get into in a separate forum.
If you're interested in learning about whether or not your brand can afford and float CAC payback window expansion, you gotta hit us up and work with Free to Grow CFO.
But let's go through the basics of scaling the high LTV game. So, one, there's enough LTV to support CAC payback within three to six months. Two, that means that we can have a controlled that allows our CAC payback window to stay within that three to six month period.
primary scaling constraint is CAC increasing too high such that LTV velocity cannot keep up with it.
But what playbook options are available to a high LTV brand? Well, there's a bunch, but let's go through some of the key ones. First, do not let your brand run out of subscription inventory. This is a death sentence. Strong monthly retention and a healthy subscriber base allows you to be more aggressive on subscription inventory because an overstocked inventory position is more likely to get drawn down by your existing subscriber base. So err on the side of caution and make sure you have more than enough inventory to fulfill all active subscriptions or else this whole game could fall apart. The other thing is Cohort modeling, you need to be looking at LTV by month in contribution margin dollars, not in revenue dollars. And looking at that compared to your CAC, at least the last 12 months, but oftentimes need to go back 12, 24, 36 months. If possible, you want to also pull analytics at the SKU and offer level to understand how CAC payback works at the SKU level and even the offer level. You also want to really look at subscribers versus non-subscribers because those segmented cohorts can look a whole lot different in terms of their CAC payback periods.
Another important playbook consideration as you're scaling the high LTV game is if you sell on both Amazon and Shopify, you need the ability to combine the cohort model. What do I mean when I say that? I mean, you need to create one cohort model that has Amazon plus Shopify combined. Why? Because if you're spending heavily on top of funnel, like Meta Spend, which you probably are if you're scaling this game, you need to be able to see the combined impact on CAC, new customer sales and LTV on a cohort basis across both channels because there is cross channel bleed over. If you don't do this, you may incorrectly conclude that Shopify and or Amazon is an unprofitable channel when in fact it is. If that seems a little scary because it is kind of an advanced analysis, reach out to us because this is something that we are experts at.
So in summary, if you're scaling the high LTV game, it's all about a controlled first order loss. It's about analyzing your LTV on a cohort basis in contribution margin dollars against that cohort's CAC every single month. It's about never running out of subscription inventory. And it's about understanding that if you sell on more than one e-commerce channel, you need to see a combined cohort model with all e-commerce channels together to truly understand how your top of funnel spend is performing. If all of this feels overwhelming, don't worry, Free To Go CFO has got your back. We're experts at running the HighLTV Growth Marketing Playbook,
and if you're interested in learning more about how the Free to Grow CFO Growth Marketing Playbook can help your brand increase profit and cash flow as you scale, check us out at freetogrowcfo.com.
