E-commerce KPIs Investors Care About Most: Contribution Margin, LTV/CAC, Repeat Purchase Rate

The E-commerce KPIs Investors Actually Care About

Raising capital for your e-commerce brand means translating data from Shopify, Google Ads, and your inventory into a story investors can believe in. Many founders get lost in a sea of metrics, unsure which ones signal a healthy, scalable business. Investors aren't looking for vanity metrics like total revenue or website traffic. They want to see the underlying financial engine that powers your growth.

The good news is that they primarily focus on just three key performance indicators for ecommerce. These metrics answer the most critical questions about your profitability, sustainability, and customer loyalty. Mastering these key metrics for e-commerce fundraising will prepare you for any due diligence conversation and give you a clear view of your own operations.

Contribution Margin Explained: A Key Metric for E-commerce Fundraising

Before you can talk about growth, you must prove your core transaction is profitable. It answers the most fundamental question: are you making money on every single order? Contribution margin (CM) does exactly that by measuring the profit from a single sale after subtracting all variable costs associated with it. This is the foundation of your unit economics.

To calculate it correctly, you must accurately distinguish between variable and fixed costs, a common hurdle where founders get tripped up in due diligence. Variable costs scale directly with each order, while fixed costs do not. Getting this wrong can undermine an investor's confidence in your financial literacy.

• Variable Costs: These typically include the cost of goods sold (COGS), payment processing fees, shipping supplies, fulfillment center fees (pick, pack, and ship), and packaging.
• Fixed Costs: These include expenses like rent for your office or warehouse, full-time employee salaries, and software subscriptions that do not change with order volume.

The calculation is straightforward. Consider a product that sells for $100:

• Revenue: $100
• Variable Costs:
  • Cost of Goods Sold: -$45
  • Pick, Pack, & Ship: -$12
  • Payment Processing (e.g., 2.9% + $0.30): -$3.20
• Total Variable Costs: -$60.20
• Contribution Margin: $39.80

Your Contribution Margin is $39.80, or 39.8%. This positive number shows that each sale generates cash to help cover your fixed operating costs and, eventually, turn a profit. Getting this calculation right in your spreadsheets, or configured properly in tools like QuickBooks in the US or Xero in the UK, is the first step investors will check.

Understanding LTV/CAC in Ecommerce: Is Your Growth Sustainable?

Once you have proven an individual order is profitable, investors want to know if you can acquire customers profitably and at scale. The Lifetime Value to Customer Acquisition Cost (LTV/CAC) ratio directly answers this. It compares the total contribution margin a customer generates over their entire relationship with you (LTV) to what it cost to acquire them (CAC).

Two critical distinctions are vital here. First, LTV must be calculated using contribution margin, not revenue. An LTV based on revenue is misleading because it ignores the costs of producing and delivering the goods. Second, CAC should only include the marketing and sales costs to acquire new customers, not marketing spend on existing ones. Blending these costs will artificially inflate your ratio and will not hold up under scrutiny.

The reality for most early-stage startups is more pragmatic: you do not have years of data to calculate a true lifetime value. For this reason, "a common proxy for LTV in early-stage companies is a 60 or 90-day LTV." This provides a credible, near-term view of a customer's value that investors can rely on for their models.

The ecommerce financial benchmarks are clear. A healthy LTV/CAC ratio is widely seen as 3:1, meaning for every $1 you spend on acquisition, you get $3 back in contribution margin. A ratio below 1:1 means a business is actively losing money on every customer. A ratio from 1:1 to 2:1 is not generating enough cash to cover fixed costs and fuel growth. Interestingly, a ratio of 5:1 or higher might suggest under-investment in growth, signaling you could be spending more to expand faster.

Repeat Purchase Rate Importance: Proving Customer Loyalty

A strong LTV is built on repeat business. The repeat purchase rate measures the percentage of customers who return for another purchase, providing a clear signal of product-market fit and brand loyalty. It answers the investor's question: is this a one-time transaction or a brand customers truly love? The proof is in the repeat purchase.

For this metric, it is crucial to use cohort analysis rather than a blended, all-time rate. A blended rate can hide serious problems, like declining retention in newer customers. Cohort analysis groups customers by the month they made their first purchase and tracks their subsequent buying behavior over time. For example, you can see if the customers you acquired in March are returning at a higher or lower rate than those from January.

This approach shows investors if your customer loyalty is improving, staying flat, or declining over time. So, what is a good benchmark? For many direct-to-consumer brands, investors look for a repeat purchase rate of 20-40% within the first 6 to 12 months. This is often tracked over shorter periods as well, such as within a 90 or 180-day timeframe. Hitting these investor expectations for online stores is a powerful indicator that your brand has staying power.

From Metrics to a Compelling Growth Story

Understanding these ecommerce investor metrics moves you from simply reporting data to telling a compelling growth story. These three KPIs are interconnected: a healthy contribution margin makes a strong LTV possible, and a high repeat purchase rate is what drives that LTV over time. By mastering them, you demonstrate a deep understanding of your business’s health.

For founders operating without a dedicated finance team, the approach is clear:

1. Nail Your Contribution Margin: Start by rigorously separating variable and fixed costs in your accounting software. Whether you use QuickBooks in the US or Xero in the UK, this accuracy is non-negotiable. This is the foundation for everything else.
2. Isolate New Customer CAC: Ensure your ad platforms and analytics are set up to distinguish between campaigns targeting new customers and those aimed at existing ones. Use tools like Shopify's reports to analyze sales by channel and attribute acquisition costs correctly.
3. Track Customer Cohorts: Do not wait for a fancy business intelligence tool. You can start tracking the repeat purchase behavior of your monthly customer cohorts today with a simple spreadsheet. The sooner you start, the more powerful your data becomes.

As you scale, you can also review working capital efficiency in our cash conversion cycle guide. Mastering these three metrics does not just prepare you for fundraising; it gives you a clear and accurate view of your business’s health, helping you make smarter decisions about pricing, marketing spend, and retention strategies.

Frequently Asked Questions

Q: What are the most common mistakes when calculating contribution margin?
A: The most common error is misclassifying costs. Founders often include fixed costs like salaries or rent, which deflates the margin. Conversely, they might forget variable costs like return processing fees or specific packaging materials. Ensure every cost that scales directly with an order is included for an accurate calculation.

Q: Why should LTV be based on contribution margin instead of revenue?
A: A revenue-based LTV is misleading because it ignores the cost of delivering the product. An investor needs to know how much actual cash a customer generates. Using contribution margin provides a true picture of customer profitability and ensures your LTV/CAC ratio reflects the real financial health of your acquisition engine.

Q: What can I do if my LTV/CAC ratio is below the 3:1 benchmark?
A: A ratio below 3:1 signals a need for optimization. You can work to increase LTV by improving repeat purchase rates and average order value, or you can focus on reducing CAC. This involves refining your ad spend, improving conversion rates, or exploring more efficient acquisition channels like SEO or referrals.

Q: How soon should I start tracking customer cohorts for repeat purchase rate?
A: You should start tracking cohorts from day one. Even with a simple spreadsheet, grouping customers by their first purchase month allows you to see retention trends early. Waiting until you have a large customer base means you might miss early warning signs that newer customers are less loyal than your first adopters.