Payback period measures how long an acquired cohort takes to pay back the spend that brought them in. Each month’s contribution margin from that cohort chips away at the acquisition spend until it breaks even. The formula: payback period (months) = CAC / monthly contribution margin per customer. Worked example: $80 of CAC, $20 monthly contribution margin, four-month payback.
Two choices in that denominator are easy to miss. First, what counts as contribution margin: revenue minus the variable costs that move with each order — product cost, payment processing, fulfillment, shipping, returns reserve, and discounts. Not revenue, and not gross margin (which stops at product economics). Second, whose contribution margin: the cohort’s monthly contribution in months 1, 2, 3, not a lifetime average that backloads repeat-purchaser value.
Payback and the LTV:CAC ratio answer different questions. LTV:CAC is a unit-economics constraint: whether a customer is ever profitable. Payback is a cash-flow constraint: how long acquisition dollars stay tied up. A brand can post a 3:1 LTV:CAC with an 18-month payback and run out of working capital; a 2:1 with a 6-month payback can be the right business when growth capital is expensive.
The right target depends on cash position, growth rate, and channel mix. Bootstrapped brands underwriting growth on first-order economics often target sub-3-month payback; VC-backed brands tolerate 6–12 months. These are operator conventions, not laws. Payback is also where paid-ads platforms and finance misalign: platforms optimize for ROAS, which does not encode time-to-recovery, while the CFO solves for payback.