Why LTV/CAC is a cash flow question, not a vanity metric
Stores fail less from “bad ROAS” and more from cash flow timing. If your payback is slow, you can be “profitable on paper” while running out of cash.
LTV/CAC is useful only when paired with payback period and a conservative view of retention. The goal is to buy customers profitably and get the cash back fast enough to keep scaling.
The simple LTV model that works for planning
A simple planning model: Revenue LTV = AOV × purchase frequency × customer lifespan. Profit LTV = Revenue LTV × gross margin % (or contribution margin %).
Profit LTV is the more honest number because CAC must be repaid from profit, not revenue. If your store has meaningful shipping subsidies, returns, and fees, contribution margin is better than gross margin.
CAC: use blended CAC at the scale you actually want
The CAC that matters is the CAC you’ll pay at scale. A channel can look great at small spend and degrade as you scale. If you plan to grow, model CAC with realistic assumptions and include volatility.
Blended CAC is often more reliable than “platform-reported CAC,” especially when attribution is noisy. If you can’t trust your attribution, you can still build a useful model with blended numbers.
Payback period: the metric that decides whether you can scale
Payback period estimates how many months it takes to earn back CAC from profit. Faster payback reduces risk and allows scaling without constant cash injections.
A store with a 3:1 LTV/CAC and 18-month payback can be riskier than a store with a 2:1 LTV/CAC and 3-month payback. Cash matters.
Common LTV/CAC mistakes that inflate your model
Mistake 1: assuming long lifespan without cohort proof. Be conservative and update as data improves.
Mistake 2: using revenue LTV as if it were profit. That inflates LTV and hides thin margins.
Mistake 3: ignoring discounts and promotions that drive repeat purchases. Frequency that requires perpetual discounts is not “free.”
Mistake 4: ignoring refunds/returns. Returns reduce realized margin and can change payback meaningfully.
How to set targets you can actually operate with
Start with contribution margin per first order to set your CPA ceiling. Then decide the payback target you can tolerate (often 1–6 months depending on cash).
If your model relies on repeat purchases, validate that repeat purchase rate is real and not driven by discount addiction. Retention is a business capability, not an assumption.
Use the LTV/CAC Calculator to model scenarios
Use scenario comparison: conservative retention vs optimistic retention. If the business only works in optimistic scenarios, it is fragile.
If you want to quickly compute LTV:CAC and payback with your inputs, use the Shopify LTV/CAC Calculator tool and keep the model updated monthly as cohorts mature.