Align bounded contribution LTV and CAC
Compatibility checkpoint
- Use contribution per customer, not revenue labelled as value. (not complete)
- Choose an explicit finite horizon and period unit. (not complete)
- Ground retention and purchase frequency in a compatible cohort or label them as scenarios. (not complete)
- Align customer definition, channel, acquisition period, currency and indirect-tax basis with CAC. (not complete)
- Distinguish contractual retention from non-contractual repeat purchasing. (not complete)
- Treat the target ratio as user-selected, not a Margin101 benchmark. (not complete)
- Define contribution per purchase and purchase frequency for one chosen period.
- Choose a finite horizon and a retention sequence supported by the cohort or scenario.
- Sum the retained contribution across that finite horizon.
- Check that bounded LTV and CAC refer to compatible customers and cost boundaries.
- Divide bounded contribution LTV by CAC; keep zero CAC as undefined.
- If testing headroom, divide bounded LTV by an explicitly user-selected target ratio.
- Use payback separately to examine recovery timing and cash capacity.
bounded contribution LTV = contribution per period × Σ retention weight from period 1 to finite horizon; LTV:CAC = bounded contribution LTV ÷ aligned CAC
- contribution per period
- Revenue less the stated contribution-cost boundary, including purchase frequency (currency units per customer per period) — business record or user scenario
- retention weight
- Scenario share of the original cohort retained in each period (ratio) — cohort evidence or user assumption
- finite horizon
- Explicit number of periods included (periods) — user-selected model boundary
- aligned CAC
- Acquisition cost for a compatible customer cohort and boundary (currency units per customer) — business record or CAC planner output
At zero CAC, the ratio is undefined. Do not display infinite efficiency.
Worked example: a bounded three-period scenario
Invented neutral scenario: revenue per purchase 100, contribution rate 40%, two purchases per period, 75% retention, three periods, CAC 50 and a user-selected target ratio of 3x.
| Period | Retention weight | Contribution before retention | Retained contribution |
|---|---|---|---|
| 1 | 1.0000 | 80.00 | 80.00 |
| 2 | 0.7500 | 80.00 | 60.00 |
| 3 | 0.5625 | 80.00 | 45.00 |
| Measure | Calculation | Result |
|---|---|---|
| Bounded LTV:CAC | 185 ÷ 50 | 3.70x |
| Allowable CAC at selected 3x target | 185 ÷ 3 | 61.67 |
| Scenario headroom | 61.67 - 50 | 11.67 |
Separate the ratio from payback and cash capacity
- Using revenue LTV while calling it contribution value.
- Projecting a constant retention rate indefinitely.
- Comparing LTV and CAC from different cohorts, channels or periods.
- Copying a 3x target without treating it as a user decision.
- Treating a ratio as proof of payback timing, cash capacity or causal incrementality.
Bound LTV to an observed cohort and finite horizon
LTV in this decision is cumulative aligned contribution across a named cohort and finite horizon, divided by the original acquired-customer count. Keep payback separate: a favourable finite LTV/CAC comparison does not show when cash or contribution recovered CAC.
| Period | Active customers | Aligned contribution/customer | Period contribution |
|---|---|---|---|
| Period 1 | 100 | 20 CU | 100 × 20 = 2,000 CU |
| Period 2 | 70 | 20 CU | 70 × 20 = 1,400 CU |
| Period 3 | 50 | 20 CU | 50 × 20 = 1,000 CU |
| Finite contribution LTV | Original cohort = 100 | 4,400 CU total ÷ 100 | 44 CU/customer |
| Compare entered CAC | CAC = 30 CU/customer | 44 ÷ 30 | 1.47 scenario ratio |
Keep value, ratio and payback as separate outputs
- Customer Lifetime Value Planner
Estimate bounded contribution value across a chosen retention horizon
- LTV to CAC Ratio Planner
Compare bounded contribution LTV with entered acquisition cost and target ratio
- CAC Payback Planner
Find when retained customer contribution recovers acquisition cost
LTV:CAC questions
- Is 3:1 a good LTV:CAC ratio?
- Margin101 supplies no universal target. In the example, 3x is a user-selected scenario input, not a recommendation.
- Why not use an infinite-horizon formula?
- It can turn uncertain retention into false precision. A finite horizon keeps the evidence boundary and terminal retained share visible.
- Is LTV:CAC the same as payback?
- No. The ratio compares bounded value with acquisition cost. Payback asks when cumulative contribution recovers that cost.
- What happens when CAC is zero?
- The ratio is undefined, not infinite. Verify the cost boundary rather than presenting zero CAC as perfect efficiency.
Sources and methodology
- LTV:CAC Ratio methodology — Margin101: Product-owned bounded ratio and user-selected target logic.
- Customer Lifetime Value methodology — Margin101: Finite contribution and retention sequence.
- Customer-Base Valuation in a Contractual Setting: The Perils of Ignoring Heterogeneity — Peter S. Fader and Bruce G. S. Hardie: Research context for cohort heterogeneity; the article does not reuse a paper-specific forecast.
- How to Project Customer Retention — Peter S. Fader and Bruce G. S. Hardie: Research context for retention uncertainty; no universal retention curve is imported.
- Estimating CLV using aggregated data: The Tuscan Lifestyles case revisited — Journal of Interactive Marketing: Model-risk context for non-contractual purchasing.
Test bounded value, aligned cost and recovery
- LTV to CAC Ratio Planner
Compare bounded contribution LTV with entered acquisition cost and target ratio
- Customer Lifetime Value Planner
Estimate bounded contribution value across a chosen retention horizon
- Customer Acquisition Cost Planner
Measure loaded and marginal customer acquisition cost across aligned channels
- CAC Payback Planner
Find when retained customer contribution recovers acquisition cost