What is LTV and CAC in ecommerce

In eCommerce, LTV stands for Customer Lifetime Value, and it’s one of the most important metrics for understanding how valuable a customer is to your business over the long term, not just after their first purchase.

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💡 What is LTV (Customer Lifetime Value)?

LTV is the total revenue you can expect to earn from a customer throughout their entire relationship with your store.

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🧮 How is LTV calculated?

There are different ways to calculate it, but here’s a simple formula:

LTV = Average Order Value (AOV) × Purchase Frequency × Customer Lifespan

Let’s break it down:

• Average Order Value (AOV): How much does a customer spend on average per order?
• Purchase Frequency: How many times do they buy in a given period (like a year)?
• Customer Lifespan: How long (on average) do they remain a customer (in years)?

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📊 Example:

Let’s say your numbers are:

• AOV = $50
• Purchase frequency = 4 times/year
• Customer lifespan = 3 years

Then:

LTV = 50 × 4 × 3 = $600

That means, on average, each customer is worth $600 over 3 years.

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💰 Why is LTV important in eCommerce?

• It tells you how much you can afford to spend on acquiring a customer (CAC = Customer Acquisition Cost).
• Helps you decide how much to invest in ads, retention, email marketing, etc.
• Shows the impact of repeat purchases, upsells, and subscription models.
• Higher LTV = more profitable customers.

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🔧 How to increase LTV

• Email & SMS marketing to bring customers back.
• Cross-sells & upsells at checkout or post-purchase.
• Subscription offers or bundles.
• Loyalty programs or VIP tiers.
• Exceptional customer service to build loyalty.

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How to compare the cost of acquiring a customer with the LTV?

The CAC stands for Customer Acquisition Cost.

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💡 What is CAC?

Customer Acquisition Cost (CAC) is the average amount of money you spend to acquire a single customer.

It includes everything you spend on marketing and sales to get someone to make a purchase.

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🧮 CAC Formula:

CAC = Total Marketing + Sales Costs / Number of New Customers Acquired

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📊 Example:

Let’s say in one month:

• You spent $5,000 on ads, email software, and marketing staff
• You acquired 100 new customers

Then:

CAC = $5,000 / 100 = $50

That means you spent $50 to get each new customer.

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⚖️ Why CAC Matters

• It helps you understand if your business is profitable.
• It should always be lower than your LTV.
  • A common healthy ratio: LTV:CAC = 3:1
• If CAC is too high, you’re either:
  • Overspending on ads
  • Not converting well
  • Or not retaining customers

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🔍 What to include in CAC?

• Ad spend (Facebook, Google, etc.)
• Agency fees
• Salaries of marketing/sales staff
• Cost of tools (like email software, landing pages, etc.)

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Comparing LTV vs CAC is crucial for understanding the profitability of your eCommerce business.

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🧮 The Key Ratio: LTV : CAC

This ratio tells you how much value you’re getting from each customer compared to what you paid to acquire them.

LTV : CAC Ratio = Customer Lifetime Value / Customer Acquisition Cost

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📊 Example:

Let’s say:

• LTV = $300
• CAC = $100

Then:

LTV:CAC = 300 / 100 = 3:1

This means you earn $3 for every $1 you spend to acquire a customer — a solid, healthy business.

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✅ What’s a Good LTV:CAC Ratio?

LTV:CAC Ratio	Meaning
< 1:1	You’re losing money. 🚨
1:1	Breaking even, not sustainable. ⚠️
2:1	Marginal profitability.
3:1	Good balance of growth & profits. ✅
4:1 or more	Very profitable — maybe underinvesting in growth. 💰

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🎯 How to Improve This Ratio

• Increase LTV:
  • Upsells, cross-sells, subscriptions
  • Retargeting & email flows
  • Loyalty programs
• Lower CAC:
  • Improve ad targeting
  • Increase conversion rate (landing pages, product pages)
  • Organic channels (SEO, content, referrals)

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⚖️ Balance is Key

If your LTV:CAC is too low, you’re burning cash.

If it’s too high, you might not be scaling aggressively enough (you could afford to spend more on growth).

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I hope this was helpful.