Podcast: How to Calculate CAC to LTV for a High LTV DTC Brand
If you sell a consumable product and think you're "playing the CAC to LTV game" without actually knowing how to measure it, this episode fixes that.
In this mini episode of The Free to Grow CFO Podcast, Jon Blair walks through the exact six-step process Free to Grow CFO uses to analyze CAC to LTV for high-LTV, consumable brands. He breaks down the common mistake of confusing average revenue per customer (lifetime revenue) with true LTV, how to convert that revenue figure into real margin dollars, how to calculate CAC per cohort, and how to line the two up to find each cohort's actual payback period. Jon closes with the strategic goal: keep scaling ad spend while holding payback period inside a 3-4 month window, and repeat the process every single month.
If you're scaling a consumables or subscription brand and want a real, repeatable method for tracking CAC to LTV instead of a vague sense that you're "doing fine," this one's for you.
Key Takeaways
Average revenue per customer is lifetime revenue, not LTV — don't confuse the two.
True LTV comes from converting that revenue figure into margin dollars, excluding ad spend.
The goal is scaling ad spend while holding payback period within 3-4 months, and repeating this analysis every month.
Transcript
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00:31 Understanding CAC to LTV Analysis
04:40 The Six-Step Process for High LTV Brands
Jon Blair (00:31)
All right, we're back with another mini episode. And today we're going to be talking about something that is super important if you run a high LTV brand. That's a brand that sells consumables. Today we're going to be diving into the step-by-step process for properly analyzing your CAC to LTV. so here's the thing. A lot of brands that sell consumable products know that they're playing the CAC to LTV game.
But they don't know how to play it. And quite frankly, they don't know how to measure it properly. So today I'm gonna take you through the six-step process for properly analyzing your CAC to LTV. Step one is export the monthly cohort data that exists in Shopify or whatever tool you use to understand customer cohort performance.
There are a number of different metrics that you can use to analyze cohort data. There's retention rate, churn rate. What we want to start with in step one of this process is we want to export your monthly cohort data expressed in average net sales dollars per customer. So when you export that data, we want to drop it into Excel. And what we'll have
Is the average spent in net revenue dollars per customer per month for each cohort. The next thing, this is key. That data is actually not LTV data. lot of people mistakenly call average spent per customer lifetime value. That's really actually what we call LTR or lifetime revenue. To convert that to lifetime value, we actually have to.
Multiply the average revenue dollars per customer by your margin removing ads, excluding ads. This is your true LTV. this is the number of margin dollars you receive every month on average per customer in each cohort. It's this number that we at Free To Grow CFO call LTV and that we ultimately want to compare to your CAC. So step three is calculate your CAC.
For each cohort. What is CAC? Customer acquisition cost. What is the formula? It's all of your ad spend divided by the total number of new customers that you acquired in any given cohort. And so what that ends up effectively being is ad spend per new customer in each cohort. So now in step four, we want to compare the CAC from step three, ad spend per new customer, to our LTV expressed in margin dollars, right? We want to compare CAC.
To LTV by month to assess each cohort's payback period. What is the payback period? The payback period is the number of months it takes for you to recover your CAC in LTV dollars. So for example, if you spend $50 in CAC to acquire the customers in a new cohort, you want to find in what month your LTV per customer in that cohort is $50. Whatever month that is.
That's your payback period. So if you get to $50 in LTV by month three, your payback period is three months. It took three months to recover your CAC in margin dollars and effectively break even on that cohort. So step five is armed with this data, you want to strategize ways to keep scaling ad spend, which is gonna what? It's gonna push that's gonna put upward pressure on your CAC. Find ways to scale ad spend at a higher CAC.
But while keeping your payback period within three to four months, there's a lot of nuance here. There are some brands that can get their CAC paid in more than four months. But generally speaking, a high LTV brand wants to optimize for scaling ad spend and keeping their payback period somewhere between three and four months. And then step six is to repeat this process monthly forever and just keep optimizing
your CAC to LTV balance. So let me review what's the sixth step process for properly analyzing your CAC to LTV? One, export your monthly cohort data into Excel, expressed in average revenue dollars per customer. Step two, convert this cohort data from revenue dollars to margin dollars. This is your true LTV. Step three,
Calculate CAC for each cohort. That's ad spend divided by new customers acquired. Step four, compare your CAC from step three to your LTV from step two by month to assess each cohort's payback period. Step five, strategize ways to scale ad spend while keeping your payback period within three to four months. And step six, repeat this process monthly forever. If you do it, you're gonna find your high LTV brand scaling from 10 million.
to fifty million plus and you're gonna be printing profitability and cash flow.
