How do you calculate LTV for a Shopify store?
You need four inputs, all of which can be pulled from Shopify orders data for the last 12 months:
- Average order value (AOV): net sales ÷ number of orders. Shopify's Analytics dashboard also reports it.
- Gross margin: (net sales − cost of goods sold) ÷ net sales. Shopify lets you record a cost per item on each product; add shipping, payment processing and packaging if you want contribution margin rather than gross margin.
- Purchase frequency: orders ÷ unique customers over the same 12 months.
- Lifespan or retention: how many years a customer keeps buying, or the share of one year's customers who buy again the next year.
Multiply AOV by purchase frequency to get annual revenue per customer, multiply by lifespan to get revenue LTV, then apply gross margin.
What formula does this LTV calculator use?
Gross-margin LTV = Revenue LTV × gross margin %
With retention r: lifespan = 1 ÷ (1 − r)
With retention r and discount rate d: LTV = annual margin × (1 + d) ÷ (1 + d − r)
LTV:CAC = Gross-margin LTV ÷ CAC
The retention version treats each year's customers as a constant share of the previous year's, which is the standard geometric model. With a lifespan input and a discount rate, the calculator sums each year's margin divided by (1 + d)year, counting a partial final year pro rata.
Worked example: what is the LTV of a $80 AOV store?
A store with an $80 average order value, 50% gross margin, 2.5 orders per customer per year, a 3-year expected lifespan and a $60 CAC:
| Step | Calculation | Result |
|---|---|---|
| Annual revenue per customer | $80 × 2.5 | $200 |
| Revenue LTV | $200 × 3 years | $600 |
| Gross-margin LTV | $600 × 50% | $300 |
| LTV:CAC | $300 ÷ $60 | 5.0 : 1 |
Now switch to retention. If 45% of customers buy again each year, expected lifespan is 1 ÷ (1 − 0.45) = 1.82 years, not 3. Annual margin is $200 × 50% = $100, so gross-margin LTV is $100 ÷ 0.55 = $181.82 and LTV:CAC falls to 3.03 : 1. Adding a 10% discount rate gives $100 × 1.10 ÷ 0.65 = $169.23. The gap between $300 and $181.82 is why a guessed lifespan deserves a sanity check: a 3-year lifespan implies roughly 67% annual retention.
What does a simple LTV formula miss?
- Cohort differences. Customers acquired in a Black Friday sale or from a particular channel often behave differently from the average. Averages blend them together.
- First order vs repeat orders. First orders often have a different AOV and discount depth than repeat orders.
- Refunds, shipping and fees. If these are not in your margin input, LTV is overstated.
- Changing retention. Retention is usually lowest between the first and second order and steadier afterwards; a single rate smooths that out.
For decisions that move real budget, a cohort-based or probabilistic model fitted to your own order history is more reliable. A short history of LTV forecasting covers the main approaches.
FAQ
Should LTV be based on revenue or gross margin?
Use gross-margin LTV for any decision about acquisition spend. Revenue LTV tells you how much a customer buys; gross-margin LTV tells you how much is left after cost of goods to pay for marketing, overhead and profit. Comparing revenue LTV to CAC overstates how much you can afford to spend.
What is a good LTV:CAC ratio for a Shopify store?
A ratio of 3:1 is a widely repeated rule of thumb, not a law. The right ratio depends on your margins after shipping and fees, how quickly the margin arrives (cash flow), and how confident you are in the lifespan or retention input. A store with a long payback period needs a higher ratio than one that recovers CAC on the first order.
Should I use customer lifespan or annual retention?
Use annual retention if you can measure it: the share of customers who buy in one year who buy again the next. Lifespan is easier to guess but easy to overstate. The two are linked: under a constant-retention model, expected lifespan is 1 ÷ (1 − retention), so a 3-year lifespan implies about 67% annual retention.
Do I need a discount rate?
Not for a quick estimate. A discount rate reduces the value of margin that arrives in later years, which matters when lifespans are long or when you compare LTV against cash spent today. Leave it at 0% for a simple average; use your cost of capital if you are making a budget or valuation decision.
If you want LTV built from your actual Shopify cohorts rather than averages, Asabisoft does LTV and retention analytics for Shopify brands.