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The 3:1 LTV to CAC Ratio Is a Myth: What to Measure Instead

The 3:1 LTV to CAC Ratio Is a Myth: What to Measure Instead

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Everyone chasing a 3:1 LTV to CAC ratio is chasing a number that came out of the pandemic ecom boom, and most brands could not survive it if LTV is measured in revenue dollars over 12 months. Until you define the margin and the time window, that ratio tells you almost nothing about the health of your business.

In this episode, John Blair, founder of Free to Grow CFO, joins me to break down how to actually measure cohort profitability, when you can afford to stretch your payback period, and how to scale ad spend without running out of cash.

What we cover:
• Why most "LTV" numbers are really lifetime revenue, and how to convert them to margin dollars before comparing to CAC
• CAC payback period as the first metric to understand, and why 3 to 6 months is the target for most consumables brands
• How strong year two and year three retention lets some brands stretch payback to 9 months (the layered cake effect)
• The seesaw model of LTV velocity: balancing new customer losses against margin coming back from returning cohorts
• Segmenting LTV to CAC by subscribers versus non-subscribers, and why a deeper subscription discount can increase profitability
• Acquisition SKUs versus retention SKUs, including a brand whose hero product on Amazon was different from Shopify
• Running sensitivity analyses on rising CAC and falling LTV before you push ad spend
• Why running out of subscription inventory is a death sentence, and why subscription brands can afford to order a little long

Guest: Jon Blair
LinkedIn: https://www.linkedin.com/in/jonathon-albert-blair
Website: https://freetogrowcfo.com

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