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Methodology

LTV to CAC Ratio Planner methodology

Compare bounded contribution LTV with CAC and a target ratio you choose.
Duc Nguyen X.By Duc Nguyen X.· Founder, Margin101Last reviewed: View update historyMethodology

Educational only: Business decision support, not accounting, tax or legal advice.

Privacy: Calculations run locally; Margin101 does not receive your commercial inputs.

Update policy: Reviewed when formulas or official dependencies change.

Scope: Market-neutral small-business planning using your own assumptions.

1. Formulas and units

Contribution Per Period
contributionPerPeriod = revenue × gross margin × purchase frequency

Where

revenuePerPurchase
Revenue per purchase (currency units on one consistent basis)Source: Business record
contributionPerPeriod
Contribution Per Period (money)Source: Calculated output
Retention Weight
retentionWeight = finite retention series

Where

retentionWeight
Retention Weight (ratio)Source: Calculated output
Bounded Ltv
boundedLtv = contribution per period × retention weight

Where

contributionPerPeriod
Contribution Per Period (money)Source: Calculated output
retentionWeight
Retention Weight (ratio)Source: Calculated output
boundedLtv
Bounded Ltv (money)Source: Calculated output
Ltv CAC Ratio
ltvCacRatio = bounded LTV ÷ CAC

Where

boundedLtv
Bounded Ltv (money)Source: Calculated output
ltvCacRatio
Ltv CAC Ratio (ratio)Source: Calculated output
Allowable CAC
allowableCac = bounded LTV ÷ target ratio

Where

targetLtvCacRatio
Target LTV to CAC ratio (whole or operational units)Source: Business record
boundedLtv
Bounded Ltv (money)Source: Calculated output
ltvCacRatio
Ltv CAC Ratio (ratio)Source: Calculated output
allowableCac
Allowable CAC (money)Source: Calculated output
CAC Headroom
cacHeadroom = allowable CAC − entered CAC

Where

allowableCac
Allowable CAC (money)Source: Calculated output
cacHeadroom
CAC Headroom (money)Source: Calculated output

Money inputs and outputs use the currency selected in the scenario without changing the canonical methodology. Rates, margins, utilisation and buffers are entered as percentages and converted to decimal values for calculation.

2. Worked example

Input assumptions

Worked values below come from the same registered engine and visible default assumptions.

Calculation and outputs

Example

Worked values below come from the same registered engine and visible default assumptions.

Contribution Per Period
80.00 currency units
Retention Weight
2.31
Bounded Ltv
185.00 currency units
Ltv CAC Ratio
3.7
Allowable CAC
61.67 currency units
CAC Headroom
11.67 currency units

The exact engine-derived outputs are shown in the labelled rows below.

Interpretation

LTV to CAC ratio compares bounded contribution value with acquisition cost and the target ratio chosen by the user.

3. Validation and boundary checks

  • All inputs must be finite and non-negative unless the formula explicitly permits a negative calculated profit or gap.
  • Rates must remain between 0% and 100%; horizons and declared counts use the exact whole-number boundaries shown by the inputs.
  • Zero denominators return an explicit unreachable state rather than Infinity, NaN or a numeric sentinel.
  • Compared records must use one consistent attribution, contribution, period and currency basis.

4. Assumptions and source classification

  • Retention, conversion, attribution and incrementality are user assumptions rather than causal claims.
  • Customer value is contribution-based and bounded to the selected finite horizon.
  • No provider rate, market benchmark, country rule or policy constant is embedded.

This planner has no current policy-data dependency. Its commercial assumptions are user supplied. Registered family-level regression suites exercise the shared business-logic engine and worked-result reconciliation.

5. Limitations

  • The workflow does not forecast demand, retention, conversion or campaign performance.
  • It does not replace financial, accounting, tax or legal advice.

This is educational decision support, not tax, accounting, legal or financial advice. Check the treatment of your actual transactions under the rules that apply to your business and seek qualified advice where appropriate.

6. Update and evidence policy

Registered family-level suites test formula invariants and example reconciliation; the release ledger records that coverage without claiming a separate oracle for every line of public copy. There is no official threshold or benchmark to refresh for this planner. Commercial inputs remain user-supplied because they vary by business and contract.

Change history

  1. : Initial public release of the LTV to CAC Ratio planner and methodology.

Related reading

Guides to interpret the decision and its assumptions.

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