How to Model CAC and LTV for an E-commerce Business in Ontario

Ontario has one of Canada's most active e-commerce communities. Shopify was founded in Ottawa, and thousands of brands across the province, from Toronto apparel labels and Hamilton coffee roasters to Kitchener-Waterloo tech accessories and home-based makers in every town, now sell online to customers across Canada and beyond. Most of them share one big question: how much can we afford to spend to win a customer?

The answer depends on two numbers. Customer acquisition cost (CAC) tells you what it costs to win a new customer. Lifetime value (LTV) tells you how much profit that customer brings in over time. If LTV comfortably exceeds CAC, you can spend more on marketing and grow. If it doesn't, every new customer quietly loses money, no matter how strong revenue looks.

The problem is that both numbers are easy to get wrong. Using revenue instead of margin, ignoring shipping and returns, or leaving agency fees out of CAC can make a struggling store look healthy. This guide walks through a disciplined approach using a running example: an Ontario Shopify skincare brand with a $68 average order value that acquires 600 new customers a month.

1. Why CAC and LTV Matter

CAC and LTV turn marketing from guesswork into a financial decision. Modeled properly, they let you:

• Set marketing budgets with confidence, knowing the maximum CAC your margins can support.
• Compare channels fairly, such as Meta, Google, TikTok, influencers and email.
• Plan cash flow, since payback period shows how long marketing spend is tied up before it returns.
• Price and bundle smarter, by seeing how average order value and repeat rate change customer value.
• Raise capital or borrow, because investors and lenders expect unit economics backed by data.

2. Clean Data First: BN Registration and HST

CAC and LTV are only as reliable as the revenue and cost data behind them. For Canadian online stores, that starts with tax setup. Your CRA business number is the nine-digit identifier the Canada Revenue Agency uses for your GST/HST, payroll and income tax accounts. You need one when you register for GST/HST, which is mandatory once taxable sales pass $30,000 over four consecutive calendar quarters, and many stores register earlier to claim input tax credits on inventory and ad spend.

BN registration is done through the CRA's Business Registration Online service, by phone or with Form RC1. Ontario corporations generally receive a BN when they incorporate through the Ontario Business Registry. Once registered, configure your store to charge tax based on where each order ships.

For modeling, always use revenue net of tax, discounts and refunds. Sales tax collected belongs to the government, and including it inflates both AOV and LTV. Clean monthly books make this easy, which is why bookkeeping services that reconcile Shopify payouts to orders are the foundation of any good unit economics model.

3. Step 1: Contribution Margin per Order

LTV should be built on contribution margin: what is left from each order after every cost that scales with that order. Here is our example brand's $68 order, net of HST and discounts:

4. Step 2: Calculate CAC Correctly

Include every cost of winning new customers, not just ad spend. Our example brand's monthly acquisition costs:

• Blended vs. paid CAC. Blended CAC uses all new customers, including organic and word-of-mouth. Paid CAC uses only customers attributed to paid channels. Track both.
• Count new customers only. Repeat orders belong in LTV, not CAC.
• Be consistent with agency fees. If an agency runs your ads, its fee is part of CAC. Our guide to a business plan for marketing agencies in Burlington shows how agencies price retainers and media management.
• Watch first-order discounts. Either reduce AOV for discounted first orders or add the discount cost to CAC, but not both.

5. Step 3: Build LTV from Cohorts

LTV formulas based on average churn rates often overstate value. A more reliable method is cohort analysis:

1. Export all orders from Shopify with customer ID, order date and net order value.
2. Group customers by the month of their first order (their cohort).
3. For each cohort, track cumulative orders per customer at 3, 6, 12, 18 and 24 months.
4. Average the mature cohorts to build your repeat-purchase curve.
5. Multiply cumulative orders by contribution margin per order to get LTV at each point.

At 2.8 orders over 24 months and $32.46 of contribution per order, 24-month contribution LTV is $90.89. Notice how different the answer looks depending on which LTV definition you use:

6. Step 4: LTV:CAC and Payback Period

With both numbers in hand, two metrics tell you whether growth is healthy:

• LTV:CAC. A 3:1 ratio is a common benchmark, but always state the definition and time period. On a contribution basis over 24 months, 2.3x is workable but leaves limited room for overhead.
• Payback period. CAC divided by contribution per order tells you how many orders are needed to recover acquisition cost. Short payback means marketing spend recycles quickly into cash.
• Overhead still exists. Contribution LTV must also cover salaries, software, rent and owner pay, so a ratio near 1:1 means the business loses money overall.

7. Step 5: Scenarios and Growth Levers

The real value of a CAC and LTV model is testing what happens when you change the inputs. Here, our brand introduces product bundles, a subscribe-and-save option and better creative testing:

None of the individual changes is dramatic, but together they lift LTV:CAC by about 40%. In the improved case, the first order alone covers CAC, so every repeat order is profit toward overhead. Other levers worth modeling include:

• Shipping strategy: negotiated courier rates, regional warehouses or a free-shipping threshold.
• Retention marketing: email and SMS flows, loyalty programs and replenishment reminders.
• Product mix: steering customers toward higher-margin products.
• Channel mix: shifting budget toward channels with the best cohort quality, not just the cheapest first purchase.

8. Putting It into a Financial Model

CAC and LTV become most powerful when they drive a full monthly forecast. A good e-commerce model links:

• Marketing budget ÷ CAC to new customers each month.
• Cohort curves to repeat orders from every past cohort.
• Contribution margin to gross profit, and overhead to net profit.
• Inventory purchases and supplier terms to cash flow, since growth ties up cash in stock.
• HST collected and paid to the tax account under your business number, so cash forecasts reflect remittances.

Our financial modeling services build these models from your real Shopify and ad platform data. Once the model is running, a fractional CFO keeps it current and turns it into monthly decisions; our playbook on how to onboard a fractional CFO in Markham shows how that works, and our fractional CFO services page explains the support available. If you're applying for financing to fund inventory or marketing, our business plan services present these unit economics in a lender-ready format.

9. Common Mistakes to Avoid

• Using revenue LTV instead of contribution LTV.
• Including HST in order values, which inflates AOV and LTV.
• Leaving agency fees, creative and influencer costs out of CAC.
• Relying on platform-reported ROAS instead of actual new-customer counts from your store.
• Projecting LTV with no time limit, rather than a defined 12 or 24 month window.
• Mixing new and repeat customers in CAC calculations.
• Ignoring cohort decay, assuming recent customers will repeat like your earliest loyal fans.

10. Frequently Asked Questions