LTV/CAC model is severely flawed for ecommerce brands.
In theory, it tells
How much money are you making from each new customer?
For every $1 spent, how many $ is generated back?
Pretty important question. Right?
In practice, both metrics LTV & CAC are flawed in answering this correctly.
Both on the acquisition side and on the retention side.
Here’s why
CAC Doesn’t consider other variable costs
It might work for software subscription businesses as other variable costs of delivery are minimal if not zero.
In ecommerce, the cost to deliver a physical product includes COGs (cost of goods sold) & 3PL partners (logistics & fulfillment)
CAC alone doesn’t account for how much it costs to get the product in the customer’s hand.
Unpredictable LTV
DTC brands, if not on a subscription or don’t have reliable historical subscription data, can’t accurately predict the LTV.
With scale, LTV mostly goes down.
Secondly, most brands don’t have cash flows to wait for 6 months or a year for returns.
They will run out of business before they realize their LTV.
Even if you can predict the LTV safely, if it’s taking you more than 1 purchase to break even, the cash cycles will be severely restricted.
So LTV: CAC is not telling the right answer.
Back to the key question –
How much money you are making from each customer?
Contribution margin (CM) is a great metric to understand your profits on a single purchase.
For a lifetime, you can find the repeat purchase rate in the next 60 or 90 days.
Multiply that percentage by your contribution margin on a single acquisition. That’s your profit from a single customer.
But again repeat purchase is not free.
In short, DTC brands should break even on the first purchase or at least in the first month to grow faster.
Don’t rely on LTV: CAC to judge your marketing efforts, for both acquisition and retention.
It might be leading to wrong insights.