Why contribution LTV
Revenue LTV counts every dollar a customer spends. Contribution LTV counts what is left after COGS, payment and platform fees and fulfillment. The second number is the one that can pay for acquisition, overhead and profit.
Using revenue LTV against CAC inflates the ratio. A store with a 30% contribution margin should not compare revenue LTV with CAC and conclude it has a 10:1 business.
The formula, step by step
Contribution per order = AOV × contribution margin. Annual contribution = contribution per order × purchases per year. LTV = annual contribution × customer lifespan. LTV:CAC = LTV ÷ CAC.
Payback orders = CAC ÷ contribution per order, rounded up. Payback months = payback orders ÷ purchases per year × 12. A low ratio with a fast payback can be better than a high ratio that takes years to recover cash.
Worked example
AOV $60, contribution margin 40%, two purchases per year, three-year lifespan and CAC $48. Contribution per order is $24. Annual contribution is $48. LTV is $144. LTV:CAC is 3.00x. Payback is two orders, or 12 months at two orders per year.
The ratio looks healthy, but the cash is tied up for a year. If the business cannot fund 12 months of payback, the same ratio may still be too slow.
Lifespan sensitivity
At one year LTV is $48 and the ratio is 1.00x; two years is $96 and 2.00x; three years is $144 and 3.00x; five years is $240 and 5.00x. Small changes in retention move the ratio more than small changes in AOV.
The table is a reminder that LTV is an assumption-driven number. A three-year lifespan that has not been observed is a hope, not a measurement.
Where the model stops
It does not model a retention curve, discount future cash, handle expanding order value or include taxes and overhead. CAC 0 returns a ratio of — rather than infinity. Payback months assume the entered purchase frequency is constant.
There is no universal LTV:CAC target. A 3:1 ratio is a common shorthand, not a law; the right threshold depends on margin, cash, payback tolerance and risk. Use the ratio with payback months, not instead of them.
How to use it
Start from a cohort-based AOV and contribution margin if you have them. Compare LTV:CAC with payback months, then test a shorter lifespan and a higher CAC to see how fragile the conclusion is.
Use the blended CAC calculator to derive CAC from channel spend and the Shopify net profit calculator for order-level profit.