How to Monitor LTV and CAC on Shopify to Aggressively Improve Profitability

Here we explain how to aggregate and monitor LTV and CAC on Shopify to improve your profitability.

LTV and CAC may be unfamiliar terms, but without tracking LTV you will underestimate the value of long-term initiatives and miss growth opportunities. Without understanding CAC, you will underestimate your costs.

We will show you how to build and monitor a KPI tree from LTV and CAC, execute the right strategies, and grow your commerce business.

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What Are LTV and CAC?

LTV stands for Life Time Value. In simple terms, it is the total profit a single customer generates over their entire relationship with your business.

CAC, on the other hand, stands for Customer Acquisition Cost — the total cost required to acquire a single paying customer.

CAC is often confused with CPA (Cost Per Acquisition). Those familiar with ad management will recognize CPA as the advertising spend needed to acquire one customer.

Unlike CPA, which only accounts for ad spend, CAC includes all costs associated with acquiring new customers — operational costs such as labor and consulting fees, as well as production and operational expenses for organic acquisition channels like SEO and UGC. Organic acquisition still incurs costs, so those are factored in as well.

Your Business Cannot Survive Unless LTV > CAC

Whether LTV exceeds CAC is a matter of survival for your business.

If LTV > CAC, acquiring more new customers increases profitability. Conversely, if LTV < CAC, acquiring more new customers actually erodes profitability.

Understanding LTV and CAC is also critical for investment decisions.

For example, if gross profit per purchase is ¥3,000 and CAC is ¥5,000, it might seem unprofitable at first glance. However, if the average customer purchases 5 times, LTV becomes ¥15,000 (¥3,000 × 5), which is 3 times higher than CAC.

Judging solely on a single purchase would lead to a flawed investment decision. Understanding LTV and comparing it to CAC is essential when making investment choices.

Generally, an LTV/CAC ratio (LTV-to-CAC ratio) of 3x or more is considered healthy.

Aim for an LTV/CAC ratio of 3 or higher!

Payback Period

When thinking about LTV and CAC, the Payback Period is also important. The Payback Period refers to how many days it takes to recoup your investment.

Even if LTV > CAC, if it takes 10 years to recoup the investment, most businesses simply cannot wait that long. Businesses backed by large capital — such as certain barcode payment services — may operate with a Payback Period exceeding 10 years, but that is the exception.

Based on your company's cash flow situation, determine how many months you can afford to wait for payback, and manage LTV and CAC so that the Payback Period stays within that timeframe.

KPIs Beyond LTV and CAC

There are other important KPIs for a commerce business beyond LTV and CAC.

LTV and CAC measure per-customer profitability and should be tracked by every commerce business, but there are also KPIs related to inventory management, manufacturing, and more.

For areas you want to manage closely, make sure you can conduct regular point-in-time monitoring of the relevant KPIs.

Shopify has compiled a comprehensive list of KPIs useful for commerce businesses. That's our Shopify! (laughs)

If you want to monitor data beyond Shopify, we recommend building a dashboard with Google Data Studio.

KPI Tree

When defining your company's KPIs, a KPI tree is a useful framework.

A KPI tree is a method of connecting KPIs to manage your ultimate goal (KGI — Key Goal Indicator), building out the tree structure and monitoring it over time.

For example, a KPI tree with revenue as the KGI might look like the following.

KPI trees vary by company, so choose KPIs that directly connect to actionable initiatives.

How to Calculate LTV and CAC

Let's walk through how to calculate LTV and CAC in Shopify.

How to Calculate LTV

The formula for LTV is as follows.

The two components needed to calculate LTV — gross profit per order and lifetime orders per customer — are calculated as follows.

The tricky part is calculating purchase frequency. Despite the word "lifetime," it's not practical to calculate over an infinite period. Typically, purchase frequency is measured over a 2–3 year window.

If your store is newly launched, you may not have accurate purchase frequency data yet. In that case, use industry average data as a placeholder to estimate LTV.

How to Calculate LTV in Shopify

There are several ways to calculate LTV using Shopify data.

Personally, I recommend going to Analytics > Reports > Customer Management > "First-time vs. returning customer sales" and customizing it to create a custom LTV calculation report.

I configure the report to display month, customer ID, order count, and gross profit, then save it as an LTV calculation report.

Export 2–3 years of data from this report, then aggregate each column as follows for LTV calculation.

Plug these numbers into the formulas below to calculate LTV.

For a paid option, the Shopify app Lifetimely makes it easy to calculate LTV. It also lets you monitor a wide range of KPIs, so it's worth using if you want a robust KPI monitoring setup.

How to Calculate CAC

The formula for CAC is as follows.

CAC = Total cost to acquire new customers / Number of new customers acquired

CAC encompasses all costs involved in acquiring new customers — not just ad spend, but also content production, event sponsorships, consulting fees, and labor costs.

Typically, for paid advertising, CAC is broken down by channel — such as Google Ads, Facebook Ads, and Instagram Ads — to evaluate whether to increase or reduce budget allocation per channel.

Overhead costs such as labor and content production can be aggregated using a project management tool with time and cost tracking capabilities, or simply managed in a spreadsheet.

How to Calculate Payback Period

The Payback Period is calculated as follows.

Work to increase gross profit and reduce CAC so that the Payback Period stays within 6–12 months.

Improving LTV and CAC

Here is how to think about improving LTV and CAC.

The KPI tree for LTV/CAC looks like the following.

Based on this KPI tree, improving LTV involves the following actions.

• Increase average order value.
• Reduce cost of goods.
• Increase order frequency per month.
• Extend and increase customer lifespan (months active).

Reducing CAC involves the following actions.

• Lower CPA (increase CVR and/or lower CPC).
• Reduce operational costs.

Implement these initiatives while keeping the following three points in mind.

• Increase LTV before scaling.
• Identify your growth drivers.
• Consider both the upsides and downsides of each initiative.

Increase LTV Before Scaling

CAC can be kept low when running bottom-of-funnel acquisition campaigns such as affiliate marketing, keyword-targeted ads, and remarketing. However, it tends to worsen when you shift to broader reach campaigns such as display network ads or sponsored placements.

That said, scaling a commerce business inevitably requires mass-market advertising.

Therefore, it is important to first build a strong LTV so that the business remains profitable even when reaching a broader audience — and only then pursue scale.

Identify Your Growth Drivers

You can generate endless initiative ideas, but randomly executing them leads to burnout.

By analyzing customer, product, advertising, and traffic data to identify high-performing customers, products, and ad channels — and understanding why they perform well — you can form informed hypotheses and reduce wasted effort.

Start by investigating why your best customers keep buying and why your top-selling products sell so well.

Consider Both the Upsides and Downsides of Each Initiative

Another important consideration when improving LTV and CAC is that an initiative designed to improve one KPI may negatively impact another.

For example, raising prices may reduce purchase frequency or worsen CPA. When evaluating initiatives, look at the total impact — not just the positive effects, but the potential trade-offs as well.

Examples of LTV Improvement Initiatives

Here are some representative examples of LTV improvement initiatives.

Increase average order value

• Raise prices.
• Sell premium / high-spec products.
• Offer add-on services.
• Promote cross-selling.
• Sell bundled products.
• Set a free shipping threshold.

Reduce cost of goods

• Increase production / procurement volume of bestsellers.
• Improve manufacturing costs.
• Optimize logistics costs.

Increase order frequency per month

• CRM in general.
• Post-purchase upsells.
• Expand product catalog.

Extend and increase customer lifespan

• Anniversary campaigns.
• Seasonal features.
• Win-back campaigns for lapsed customers.
• Personalized product recommendations.
• Enhanced customer support.
• Email newsletters.
• Loyalty programs.

Examples of CAC Improvement Initiatives

Here are some representative examples of CAC improvement initiatives.

Improve CVR

• UI improvements.
• Enrich product information.
• Collect reviews.
• Add more payment methods.
• Shift budget to high-CVR ads.

Lower CPC

• Shift budget to low-CPC ads.
• Improve quality scores.
• Lower bid amounts.

Reduce operational costs

• Streamline and automate operations.
• Repurpose content and creatives.

For both LTV and CAC initiatives, many system-related improvements can be addressed by installing the right Shopify apps.

Executing CRM Operations with StoreHero

StoreHero supports merchants who want to grow sales on Shopify through thorough execution of growth initiatives.

For CRM initiatives, we leverage the StoreHero growth platform to deliver highly granular operations — such as personalized product recommendations and offers via email, LINE, and My Page, powered by customer purchase history, attribute data, and product/SKU performance and inventory data — that are difficult to achieve through manual management, along with large-scale initiative execution to drive continuous growth.

We are currently offering free store diagnostics. If you have challenges with CRM or growth initiatives in general, please reach out. Learn more about our free store diagnostic

Summary

We have covered how to aggregate LTV and CAC in Shopify and implement improvement initiatives. Many stores monitor revenue, gross profit, and CPA, but LTV and CAC often go untracked.

Without tracking LTV, the priority of long-term strategies like CRM becomes artificially low, causing you to miss growth opportunities. Without understanding CAC, you will systematically underestimate your costs.

We encourage you to build a KPI tree from LTV and CAC, monitor it consistently, execute the right initiatives, and grow your commerce business.

StoreHero can support you across all aspects of Shopify growth, including LTV maximization. Feel free to get in touch. =>View StoreHero's service overview