LTV:CAC ratio for ecommerce: what a customer is worth

Customer lifetime value (LTV) divided by customer acquisition cost (CAC) is a ratio borrowed largely from SaaS, where margins are high and customers pay every month. A shop sells at a margin, so the LTV:CAC ratio means something different in ecommerce: it tells you what you can pay for a customer only once LTV is counted in profit.

Below are the formula, a worked example and a way to derive your own target from margin and repeat purchases. Every example uses round numbers you can check by hand.

LTV:CAC is a profit question

The ratio divides the value a customer brings in over time by what it cost to acquire them. A ratio built on revenue ignores what the products and the orders cost, which is why the value on top has to be profit.

LTV:CAC = customer lifetime value ÷ customer acquisition cost. For CAC, Google Ads defines it as the ad spend allocated to new customers divided by the unique new customers acquired (Google Ads Help, Metrics). The formula and its pitfalls are in customer acquisition cost for ecommerce. We call this cost nCAC, the cost of a new customer, and CAC is the same figure: nCAC just makes clear that only new customers are counted, not repeat buyers. Which of these metrics to steer by is covered in ROAS, MER, POAS, ROI and nCAC.

In the example below, a shop spends €60,000 on ads that win 1,000 new customers, so nCAC is €60,000 ÷ 1,000 = €60.00. Each new customer places a €100.00 order at a 40% margin and, over 12 months, 2.5 orders in total. The nCAC calculator works out your own nCAC and first-order profit from ad spend, orders and new customers.

You will often see 3:1 quoted as the target. It is a common rule of thumb in SaaS; we haven’t verified it for ecommerce, and the section on margin below shows why it can’t travel unchanged.

How do you calculate LTV in ecommerce?

Add up what customers ordered. Observed LTV is the revenue or profit a customer has produced so far, over a window that starts at their first order. It counts orders that happened, nothing forecast. An estimate of what a customer will produce before the window ends is predicted LTV, and it has to be checked against these observed orders later.

Revenue LTV = sum of order values. Profit LTV = sum of order profits. With constant figures, profit LTV is order value × margin × orders per customer. In the example: €100.00 × 2.5 orders = €250.00 of revenue, and €250.00 × 40% = €100.00 of profit.

Count returns and cancellations out: use net order values, so a refunded order doesn’t linger in LTV. Fix the window too. A customer who ordered 12 months ago and one who ordered last week can’t be averaged without comparing a full year with a week.

Revenue LTV and profit LTV disagree

On revenue the example looks healthy at 4.17; on profit it is 1.67. Profit LTV is the one to use, because revenue LTV can’t tell a profitable customer from one who only cost the shop money.

The profit ratio has a fixed break-even. A profit LTV:CAC of 1.0 means the customer’s profit exactly repaid their acquisition cost. It is the lifetime version of break-even POAS: POAS = ROAS × contribution margin, and POAS 1.0 is break-even on a single sale.

A fixed 3:1 depends on your margin

Profit LTV:CAC equals revenue LTV:CAC multiplied by the contribution margin, so the same 3:1 headline hides very different results by margin. It follows from the definitions: profit LTV is revenue LTV × margin, and CAC is the same on both sides.

At a margin of 33.3% a revenue ratio of 3:1 is exactly break-even, and below that the customer’s profit doesn’t repay the cost of winning them. A shop with a 20% margin can hit 3:1 on revenue and still lose money on every customer.

Margin also decides how many orders a customer must place. At an nCAC of €60.00 and a €100.00 basket, a 20% margin needs three orders to repay acquisition, and a 60% margin needs one.

Derive your own target ratio

Start from break-even, then decide how much of a customer’s lifetime profit you want left after paying for them. The ratio you need is 1 ÷ (1 − the share you want to keep).

Keeping 50% of lifetime profit needs a profit ratio of 2.0. Keeping two thirds needs 3.0, which is what a 3:1 rule of thumb assumes when it is measured on profit. Fixed costs such as salaries and rent come out of what is kept, so a shop with high overheads needs a larger share.

Margin and repeat rate then tell you whether the target is realistic. Profit LTV = order value × margin × orders per customer, so a higher margin or more orders per customer lifts the ratio, and the same CAC buys less if either is low. Break-even ROAS per product shows the margin side per product, and the break-even ROAS calculator gives you the floor to start from.

Cohorts show when a customer pays back

Repeat purchase rate is the share of customers who place a second order, and a cohort analysis shows when those orders arrive. Group customers by the month of their first order, then follow each group for the same number of months.

Repeat purchase rate = customers with 2 or more orders ÷ all customers in the cohort. In the example, 600 of 1,000 customers come back (60%, chosen for round numbers, not a benchmark) and place 1,500 further orders between them. That gives 2,500 orders for 1,000 customers, or 2.5 each.

Read the line against the acquisition cost. The cohort starts at €40.00 of profit from the first order, below the €60.00 it cost. It crosses that cost before month 6, and everything above the line after that is profit left after acquisition.

A young cohort looks worse than it is, because its repeat orders haven’t happened yet. Compare cohorts at the same age, and judge a recent month only against older ones at the same point.

What is LTV bidding?

Give Google Ads a conversion value that reflects what a customer is worth over time, and Smart Bidding can bid on it: that is LTV bidding. Google Ads Help (Conversion value) sets out the trade-off: “Short-term conversion values can be useful when you want to maximize immediate profit or customer acquisition as cash flows allow. Lifetime conversion values can be more useful when trying to maximize long term growth.”

Google’s customer lifecycle goals are powered by Smart Bidding for Performance Max, Search, Shopping and Demand Gen campaigns. The New Customer Value goal works with Target ROAS and Maximise conversion value, and Google recommends it for all advertisers with purchase conversion goals. Google’s metric called New customer lifetime value is defined as “the conversion value adjustment corresponding to acquisition conversions”. It adjusts the value of a first purchase. It isn’t a measure of what the customer goes on to spend.

Google also notes that where gains are hard to track, a conservative estimate is often more helpful than no value at all. Its example is word-of-mouth, not repeat orders, so read it as a principle: a cautious value beats none.

Smart Bidding can only bid on the values it receives. Product Metrics delivers new-customer, profit and lifetime-value conversions to Google Ads as separate conversion actions, so Smart Bidding can value profit and customers who come back, not only the first order. Every purchase is sent marked new or returning. The Full Signal Tracking page puts the last action this way: “Repeat buyers are valued by their lifetime value, not just their first basket”.

Product Metrics shows nCAC per product and as an average, so the single €60.00 in this example becomes one figure per product. New customers have their own conversion action in Google Ads, and the average nCAC is ad spend divided by new customers, which lets you set a product’s acquisition cost next to the profit its customers have produced. Full Signal Tracking delivers the values on a unique endpoint on your own domain, and it gets through every adblocker. It is included in the Pro subscription; see pricing.

Use LTV:CAC in four steps

Pick the window and the profit basis first, because every later number depends on them. Then compare with nCAC and send the values to Google Ads.

To check that the purchases behind these numbers reach Google Ads, run the ad blocker test in your browser, and decode a request with the SDK debugger.

Check your last full cohort

To see which products win new customers cheaply, Product Segmentation segments your products by clicks and return, and Product Metrics shows nCAC next to them. For the targets that follow from your margin, read how to set a target ROAS from your margin.

Then work out the profit LTV of your last full cohort (average order profit × orders per customer in 12 months) and divide it by your nCAC. Under 1.0 means acquisition didn’t repay itself in that window, however handsome the revenue ratio looks.