E-commerce Unit Economics: AOV, CAC, and LTV Explained

E-commerce unit economics answer a fundamental question: does each customer generate profit after you account for the cost of acquiring them, the cost of goods, and operational expenses? If the answer is no, scaling only accelerates losses.

The three core metrics are Average Order Value (AOV), Customer Acquisition Cost (CAC), and Customer Lifetime Value (LTV). Together, they tell you whether your business model works.

Average Order Value (AOV)

AOV measures how much a customer spends per transaction:

AOV = Total Revenue / Number of Orders

How to Increase AOV

• Bundle products — Offer complementary items at a discount
• Free shipping thresholds — Set the threshold 20-30% above current AOV
• Upsells and cross-sells — Suggest related items at checkout
• Volume discounts — Incentivize larger orders with tiered pricing

Industry	Typical AOV
Fashion/Apparel	$80-120
Beauty/Cosmetics	$50-80
Electronics	$150-300
Home & Garden	$100-200
Food & Beverage	$30-60

Customer Acquisition Cost (CAC)

CAC = Total Marketing & Sales Spend / New Customers Acquired

CAC by Channel

Track CAC separately for each channel:

• Paid Search — High intent but competitive ($20-80 per customer)
• Social Ads — Lower cost but lower intent ($15-50 per customer)
• Email Marketing — Lowest CAC for repeat customers ($2-5 per customer)
• Organic/SEO — Zero marginal cost but requires upfront investment
• Referral — Often the most efficient at scale

Blended vs. Channel CAC

Blended CAC averages all channels together. It's useful for high-level modeling but masks inefficient channels. Always track both.

Customer Lifetime Value (LTV)

For e-commerce, LTV depends on repeat purchase behavior:

LTV = AOV × Purchase Frequency × Customer Lifespan

Or using contribution margin:

LTV = (AOV × Gross Margin %) × Purchase Frequency × Average Customer Lifespan

Improving LTV

1. Loyalty programs — Reward repeat purchases
2. Subscription options — Convert one-time buyers into subscribers (subscribe & save)
3. Post-purchase email flows — Re-engage customers at optimal intervals
4. Product quality — The simplest retention strategy is a great product

The LTV:CAC Ratio

This single ratio determines business viability:

LTV:CAC Ratio	What It Means
< 1:1	You lose money on every customer
1:1 - 2:1	Barely breaking even after operating costs
3:1 - 4:1	Healthy, sustainable business
5:1+	Either very efficient or under-investing in growth

Contribution Margin per Order

Beyond LTV:CAC, measure contribution margin per order:

Contribution Margin = Revenue - COGS - Shipping - Payment Processing - Returns

Example:

• Revenue: $100
• COGS: $35 (35%)
• Shipping: $8
• Payment Processing: $3 (3%)
• Returns Reserve: $10 (10% return rate)
• Contribution Margin: $44 (44%)

Modeling E-commerce Unit Economics

A robust e-commerce financial model projects these metrics across growth phases. Key inputs:

1. Traffic and conversion rates by channel
2. CPC/CPI trends for paid channels
3. COGS percentage including landed cost and packaging
4. Return rate by product category
5. Repeat purchase rate and frequency
6. Operational costs (fulfillment, support, platform fees)

Revenue Map automates these calculations across three growth phases, with Monte Carlo simulation to stress-test assumptions. See our SaaS financial modeling guide for how subscription businesses approach the same challenge.

Key Takeaways

1. Track AOV, CAC, and LTV as your core unit economics metrics
2. Measure CAC by channel, not just blended
3. Target a 3:1 LTV:CAC ratio as a minimum for profitability
4. Contribution margin per order reveals your true per-transaction economics
5. Use financial modeling tools to project how unit economics evolve as you scale