CAC and LTV: The Numbers Every Luxury Fashion Founder Should Love
As a founder of an emerging brand in luxury fashion, you have to wear many different hats. In some cases you are a fashion designer, a technology expert and a marketing executive all in one.You might not even only wear different hats metaphorically, you might also manufacture and sell them, but joke aside, you are concerned about a lot of different things when you are in luxury fashion ecommerce. Platforms like Shopify have made the technology part cheaper and easier, but it is still not easy to make the numbers in your business add up. One of the most important numbers in your business is your customer acquisition cost or abbreviated CAC, this number decides whether you make or lose money and relates to all parts of your business. Knowing whether your CAC is good or bad and how it all relates to your business success as an emerging brand in luxury fashion ecommerce is not as easy as it seems either.
Do You Actually Know What's in Your CAC?
On the surface it is easy, CAC is your cost to acquire a new customer, but different businesses can have different definitions of what is included in CAC. For example, some ecommerce merchants only count what they spend on online advertising toward the cost of customer acquisition and forget about platform fees. Furthermore, while having an average CAC for your business, it makes a lot more sense to look at CAC on a channel by channel basis. A new customer that you have found running Google Ads has a different cost than for example advertising on Meta platforms like Facebook or Instagram. Most fashion brands will find value in their channel mix and understanding the CAC of each channel. Overall, the CAC for an ecommerce fashion brand is between $120 and $140 with CAC going up to $800 to get a single new customer for some luxury fashion brands.
Even if you are selling expensive luxury items, it’s a significant cost for you and can be a problem as long as your LTV:CAC is out of balance. To be specific, below 2:1 is unsustainable. In this case, you are spending too much relative to customer value. Between 2:1 and 3:1 is an acceptable ratio, but it’s tight. This situation will leave you with very little room for operational costs. A LTV:CAC ratio of 3:1 is the standard target for most entrepreneurs. It’s healthy and scalable. 4:1 is strong and some experts recommend this over 3:1. However, anything above 5:1 means that you are potentially underinvesting and leaving growth on the table. This is interesting, because usually the higher the ratio the better the growth, but they are right, you might under invest. Of course, having a high ratio is very good, but if you have extra resources and want to grow your business, you would want to spend more on CAC to get extra customers. For example, imagine that you have organically built a cult following online and therefore you have a very high LTV:CAC ratio beyond 5:1, because customers come to you naturally and you are not running online ads. It can make sense to use the additional funds to run ads even if your LTV:CAC ratio drops to 3:1, because this will mean that you are acquiring a larger customer base and a lot of the lifetime value of the customer is not captured all at once, but over a very long period.
The LTV:CAC Ratio, Explained Simply
These ratios are easier to grasp with a simple example. At 1:1, your LTV just covers your CAC. You spend one unit to acquire the customer and earn back exactly that much over their lifetime. No profit, no spare CAC to replace them once they leave, so once that customer churns, you're back to zero.
At 2:1, your LTV covers two units of CAC. One to acquire the customer, and one left over. That spare CAC is yours to keep as profit, or to reinvest in replacing this customer once they eventually leave. Either way, you're past breakeven.
At 3:1, it gets more interesting. One CAC acquires the customer, one CAC replaces them when they churn, and a third is left over to acquire an entirely new customer, so your customer base grows instead of just holding steady. This is why a 3:1 ratio is considered scalable.
The same logic keeps compounding at higher ratios. Every extra unit of CAC your LTV covers is fuel for growth rather than just upkeep. Of course, real businesses have other costs to factor in, but this is the core intuition. The more your LTV outpaces your CAC, the more room you have to grow without spending more to do it.
You want to know the LTV and CAC of your customers very well, because the cost of the means of customer acquisition have been rising a lot in recent years. Customer acquisition cost in ecommerce in general is up 40% since 2023. This is due to several factors which have an effect on your CAC.
A Quick Example
Let’s illustrate what LTV and CAC might look like with a fictional example. The brand name is not real, but the case study numbers will help us understand LTV and CAC better. Oyo is a London-based fashion brand making luxury hats inspired by traditional Khalkha headdresses.
Oyo’s customers have an Average Order Value (AOV) of $650 and they place 3 orders on average over the lifetime of the customer relationship with the brand. In other words, one of Oyo’s hats is $650 and an average customer of the new brand buys 3 hats with the brand. This tells us two things: it's a shame there aren't more occasions to wear Oyo's headdresses, and the brand's LTV is $1,950.
Oyo’s marketing department has spent $820,400 on advertising this year and has acquired 2,051 new customers. In real life, the calculation would consider more factors, but we want to keep it simple and calculate the Customer Acquisition Cost (CAC) by dividing the total advertising spend by the number of new customers acquired this year. This would be $820,400 divided by 2,051 resulting in a CAC of $400.
We already know that Oyo’s LTV is $1,950 which means that after dividing it by $400, we get a LTV:CAC of 4.9. This is considered a scalable LTV, because Oyo can pay for acquiring the new customer, it can replace the customer once they eventually leave the brand behind, they can acquire more than 2 new customers with the funds that are left for further growth.
To keep your LTV:CAC ratios healthy, you can either decrease your acquisition costs, but with costs such as advertising seeming to rise all the time, most brands have started to increase the LTV of their customer base by focusing on retention and optimizing revenue.
This is also what Shopify is recommending to merchants. For example, fashion and accessories brands run limited-time promotions. Promotions are particularly effective in the fashion industry, where trends change rapidly and customers are motivated by the fear of missing out (FOMO). They also optimize email marketing, because email marketing is especially useful in the fashion industry, where staying top-of-mind with customers is key. A fashion business should also send tailored content, special offers, and updates on new collections to encourage repeat business and lower your overall CAC. Whenever possible, invest in retargeting ads. Retargeting ads remind potential customers of items they viewed or added to their cart, nudging them to complete their purchase. By bringing back people who have already demonstrated interest, you can increase conversion rates.
As you can see, customer acquisition cost can not just be explained with one number. It can vary depending on industry and even be very different in the same ecommerce category. You can only really understand it when you consider the relation between customer lifetime value, customer acquisition cost and the effect it will have on the growth and health of your business. Not only that, but the cost of acquiring customers through means such as advertising online is always rising which means that you want to invest in retention of existing clients and encourage them to stay longer and spend longer with your brand. However, it is always an extremely important metric and in relation to LTV can tell you a lot about the health and growth potential of your business.
About The Author
Bastian Lauer is one of the founders of Mata Services. Mata is a company helping brands of all sizes build and maintain their ecommerce websites. We've worked with over 20 ecommerce brands, mostly in fashion, luxury, cosmetics, jewelry, and skincare. We helped our clients build and maintain websites which accumulate 10M visits, over $70M in total sales and half a million orders during a usual year.
