How to Measure Customer Lifetime Value: Calculate CAC Payback & Scale Profitably

Introduction

For most direct-to-consumer (DTC) brands, Customer Lifetime Value (LTV) is one of the most critical metrics in the business,  but also one of the most misunderstood. It gets tossed around in boardrooms, dashboards, and agency pitches, yet very few people calculate it in a way that actually reflects financial reality.

Here’s the problem: most teams treat LTV as a revenue number when in reality it needs to be a profit number.

Because if you’re using LTV to answer the fundamental question, “How much can I afford to spend to acquire a customer and still run a profitable business?”, then a revenue-based formula will send you down the wrong path. It’ll make you think you can afford to spend more than you actually can, and that’s the fastest way to scale yourself straight into a cash crunch.

This blog will break down:

• The dangers of revenue-based LTV formulas (and why Shopify’s own calculation gets it wrong).
• The correct profit-based formula for LTV.
• How to use LTV to calculate CAC payback windows.
• How the LTV:CAC ratio shows your total return on acquisition.

By the end, you’ll have a clear framework for measuring LTV in a way that actually protects your margins, your cash flow, and your ability to scale.

The Problem With Revenue-Based LTV Formulas

Formula: Gross Profit Per Customer × Purchase Frequency

Even Shopify’s own blog on How To Calculate Customer Lifetime Value (2025) gets this wrong. They define “Customer Value” as Average Order Value × Purchase Frequency.

But that’s not value, that’s revenue.

If you use this version, you’ll think you can spend up to $200 to acquire a customer who makes two $100 purchases in a year. Sounds great on paper.

The problem? It ignores costs, product, fulfillment, shipping, 3PL, and transaction fees. Once you apply a 60% gross margin, that “$200 value” drops to just $120 in actual profit contribution.

That $80 blind spot is the difference between scaling sustainably and scaling into a cash crunch.

The Correct LTV Formula for Profitability

And this is where we need to distinguish between revenue and value. Revenue is what the customer spends with you. Value is what’s left after costs. If you’re calculating LTV to understand CAC payback, and you use revenue instead of value, you’re setting yourself up for disaster.

The correct formula is Gross Profit Per Customer × Purchase Frequency.

Here’s why.

Using a revenue based formula formula for LTV:

• $100 AOV × 2 purchases = $200 LTV

On the surface, that says you can afford to spend up to $200 to acquire this customer over 12 months.

But once you account for a 60% fully loaded gross margin (product, packaging, 3PL, shipping, transaction fees), the reality looks very different:

• $200 × 60% = $120

At first, you’ll think you can afford a $200 CAC. In reality, you’d be unprofitable beyond $120. That $80 blind spot is the difference between scaling sustainably and running out of cash.

And this is just one part of the profitability puzzle. If you want to go deeper, check out our blog: 3 Proven Levers to Unlock Margin Expansion, where we break down additional ways DTC brands can expand margin and protect profitability.

What Is a CAC Payback Window in Ecommerce?

Why Some Brands Aren’t First-Order Profitable

The CAC payback window is the number of months it takes to recover your acquisition costs from the gross profit generated by a customer.

It’s one of the most important metrics for scaling, because it answers a critical question: “How long until my marketing spend turns back into cash I can reinvest?”

Many DTC businesses – especially those with strong repeat purchase rates – aren’t profitable on the first order. It’s a feature of the business model, rather than a bug.

As you scale paid media, your CAC almost always rises. Eventually, the cost to acquire a customer will exceed the margin you make on their first purchase. If you force yourself to be first-order profitable, you’ll put an artificial ceiling on your growth.

Smart brands flip the script. They accept short-term losses on acquisition because they know customers will come back. With a strong repeat purchase rate, the question isn’t “Did I make money on the first order?”, it’s “How quickly can I earn it back?”

How to Calculate CAC Payback

Your CAC payback period tells you how long it takes to recover your acquisition cost from the gross profit generated by a customer.

Here’s the formula:

CAC Payback Period (months) = CAC ÷ Gross Profit per Customer per Month

Where:

• CAC = total sales & marketing costs to acquire one customer
• Gross Profit per Customer per Month = (Monthly Revenue per Customer × Gross Margin %)

Example

• CAC = $600
• Average revenue per customer per month (ARPU) = $200
• Gross margin = 70% → $140 gross profit per month
• CAC Payback = $600 ÷ $140 ≈ 4.3 months

So in this scenario, it takes just over four months for a customer to “pay back” their acquisition cost.

Why This Matters

Every time you acquire a customer at a loss, you’re effectively taking a loan out against that customer. You’re betting that they’ll come back and spend enough to cover your acquisition cost and then some.

If your CAC payback window is short, that loan gets “repaid” quickly, meaning you recycle cash faster, reinvest in growth, and keep scaling. But if your window is too long, or worse, miscalculated, you end up in a cash flow crunch. On paper the business might look like it’s growing, but in reality you’re running out of money before customers ever become profitable.

This is why anchoring LTV on revenue is so dangerous. Revenue doesn’t pay salaries or suppliers, profit does. If you build your payback model on revenue-based LTV, you’ll misjudge the window and overspend on acquisition.

By measuring against gross profit, you get the real timeline for CAC payback and see clearly whether your cash flow can support the growth you’re chasing.

StoreHero does this automatically. Jump into LTV > Cohorts and you’ll see your CAC payback window calculated against actual gross profit, not vanity revenue numbers.

LTV:CAC Model

So far, we’ve covered Gross Profit–based LTV and looked at the CAC payback period. The final piece of the puzzle is the LTV:CAC ratio, what it is, how it’s used, and why it matters for ecommerce growth.

As we said at the start of this blog, the whole point of measuring LTV is to understand how much you can afford to spend to acquire a customer. The CAC payback window helps with this by telling you how quickly you earn back your acquisition cost.

For example: if it costs $600 to acquire a customer and you make $150 gross profit per month from them, your payback window is four months. That’s the speed at which you break even.

The LTV:CAC ratio, however, tells a different story: it measures your total return on acquisition. Using the same customer example, if they stay with you for two years and generate $3,600 in gross profit, your LTV:CAC ratio is 6:1.

• Payback window = speed of recovering your investment
• LTV:CAC ratio = total return from that investment

Both metrics matter. Payback shows whether your cash flow can sustain growth, while LTV:CAC shows whether you’re generating enough long-term value to justify scaling. Shopify mention here that a good benchmark for LTV:CAC is 3:1

In this video, we walk through exactly how ecommerce brands should measure Customer Lifetime Value (LTV) and calculate their CAC payback window using gross profit instead of revenue. You’ll see real cohort examples inside StoreHero and learn why relying on revenue-based formulas can leave your cash flow exposed.

Watch our full video on How much should you spend to acquire customers? LTV vs. CAC explained!

Why Getting LTV Right Matters

When it comes to scaling an ecommerce brand, LTV is the foundation of financial clarity. Get it wrong, and you’ll overspend on acquisition, run into cash flow bottlenecks, and wonder why growth always feels like a treadmill. Get it right, and suddenly you know exactly how much you can afford to invest, how long it will take to get that money back, and how profitable those customers will be over their lifetime.

The key takeaway is simple: stop treating LTV like a vanity revenue metric. Anchor it in gross profit, pair it with CAC payback windows, and track your LTV:CAC ratio. That’s the framework investors, operators, and winning brands rely on.

At StoreHero, we’ve built this directly into our platform so you don’t need to run manual spreadsheets or guesswork. Jump into LTV > Cohorts and you’ll see your payback windows and ratios tracked in real time, against actual profit, not inflated revenue.

Because in the end, revenue is vanity. Profit is the only source of truth.

Ready to see your LTV, CAC payback, and profitability metrics tracked in real-time?
Book a demo with StoreHero and start scaling with confidence.