Level 7 · LTV:CAC and payback

Two questions about every customer you buy

LTV:CAC compares what a customer is worth with what it cost to acquire them. A ratio of 3 means every dollar spent on acquisition comes back three times as margin. CAC payback asks how long that takes: the number of months of margin needed to earn back the acquisition cost.

LTV:CAC        = margin LTV / CAC
payback months = CAC / monthly margin per new customer

Both use margin, not revenue. At the 2025 margin rate of 53.84%, a customer who keeps $1,000 of purchases leaves the store about $538 to pay for the ad that found them.

Margin, by cohort

Margin here is the discounted line value minus quantity * unit_cost, on valid lines of booked orders that were not returned. Nine products have no cost; their lines are left out. Per-customer numbers divide by the cohort’s size (everyone acquired that year), not only by customers who have margin lines.

Monthly margin for payback comes from each customer’s first 365 days, divided by 12. Why the first year? Payback is about the early months, and every cohort can be compared over the same age. That is why 2025 is excluded: its customers have not had a full year yet.

The result

first_year  new_customers     cac  first_year_margin  margin_to_date  ltv_to_cac  payback_months
2023                  574  665.84            1727.67         2995.81        4.50             4.6
2024                  525  841.70            1020.11         1276.82        1.52             9.9

Both cohorts pay back within a year. The 2023 cohort looks far stronger, for two reasons you have met before: it has had three years to buy instead of two, and it includes regulars who signed up before 2023 and only look new because the data starts then.

Reading the ratio honestly

The ratio uses margin to date, so it grows every month a cohort keeps buying. A young cohort with 1.52 is not a failure; compare cohorts at the same age, or use a predictive margin LTV (level 4) when you need a forward number. Also remember that blended CAC charges all spend, including email to existing customers, to new customers.

Common mistakes

• Revenue LTV over CAC. It overstates the ratio roughly twofold here, because about half of revenue pays for the products.
• Joining spend to lines. Joining marketing_spend before aggregating repeats each spend row per match. Aggregate each input to one row per year first.
• Dividing by customers with margin. A customer whose only order was returned still cost CAC.

Interview note

“What is a good LTV:CAC?” The textbook answer is about 3:1 with payback under 12 months. The better answer adds that it depends on the LTV definition and the age of the cohort.