Recurring vs. reoccurring: why ecommerce needs its own profitability playbook

Ecommerce has become a tough game.

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Production costs are rising, tariffs and trade wars are on the horizon, inflation is sticky, and customer acquisition costs (CAC) just keep climbing. The space is also more crowded than ever, making profitability harder to achieve. There is no doubt that running an ecommerce business is a serious challenge in the current environment. You need to be on top of your game to survive and thrive.

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Finaloop’s Head of Education, Jacob Becker, discusses the true cost of building a sustainable ecommerce business.

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Here’s what drives profitability in an ecommerce business. Keep reading to find out why real-time accurate financials are so critical for informed decisions. 

Recurring vs. reoccurring and SaaS vs. ecommerce

Let’s set one thing straight  – SaaS and ecommerce are entirely different business models.

This affects everything: valuations, methodologies and, most importantly, revenue models. SaaS businesses rely on recurring revenue, meaning customers pay on a set schedule (monthly, annually, etc). Ecommerce, on the other hand, depends mostly on reoccurring purchases, which are not guaranteed.

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A customer might buy your product in March and again in November, but it’s generally not part of a subscription. While patterns emerge, this revenue model is far less predictable than SaaS. That’s why ecommerce business valuations look so different from SaaS, and why brands with strong subscription models (like HIMS) tend to do very well.

LTV and CAC: breaking it down

One important ratio is the lifetime value (LTV) vs. customer acquisition cost (CAC). Here’s how this works:

If your average order value is $50, your average customer orders twice a year, and lasts as a customer for 1.5 years, your LTV would be 50 x 2 x 1.5= $150. 

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Your acquisition costs are calculated by taking your total acquisition costs for new customers, and dividing them by your new customers. Meaning, if you spent $5,000 on marketing costs for new customers, and have 50 new customers, your CAC would be $100. 

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If your LTV established above is $150, your LTV to CAC would be 150 : 100 = 1.5.

Why LTV:CAC matters

Why should you care about this ratio? Because it defines whether your business model actually works. If your LTV only matches CAC, you’re barely breaking even – before considering operating costs.

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For example:

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• CAC = $100
• LTV = $100
• COGS = $20
• Opex per customer = $50

That means you’re losing $70 per customer. Not where you want to be.

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A common benchmark you may have heard is the 3:1 rule. It says you should be making at least 3x your CAC in LTV for a healthy business. However, this ratio is imported from the SaaS world and doesn’t fit the ecommerce world.

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Ecommerce businesses deal with high COGS and delivery costs – often 45% of net sales. If you don’t factor that in, your LTV:CAC ratio will be misleading.

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Instead of using AOV in the calculation, gross margin is more appropriate.

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For example:

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• CAC = $100
• Sales per customer = $300
• COGS = 50% of sales ($150)

Your gross margin in this example is $150, not $300. That means your real LTV:CAC is 1.5:1, not 3:1. If you’re making decisions based on the wrong metric, you could be setting yourself up for failure. The implication is this –  for the economics to make sense your AOV and customer retention need to be even stronger for the numbers to work.   

Ratios and their limitations

While LTV:CAC is useful, remember – it doesn’t show the full picture.

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As mentioned, ecommerce is built on reoccurring purchases, not recurring revenue. That means LTV calculations rely on assumptions about future behavior which is inherently unpredictable.

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While LTV:CAC may be a useful indicator, what really matters is actual unit economics and bottom line profitability. These metrics are real-time, data-driven and don’t require guesswork about customer lifetime. However, to make this possible, you need real-time bookkeeping from brands you can trust. Ecommerce accounting is notoriously complex, so choose your ecommerce bookkeeper carefully.

Profitability, profitability, profitability

At the end of the day, profitability is what matters. We have moved, in a healthy way, from the world of growth (2021) to profitability (last few years). The only way to be profitable is to dig deep, on a per SKU basis, and make sure that you are profitable on this unit.

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Many brands don’t go deep enough on SKU profitability. Instead, they cross-finance weaker products with stronger ones. This creates hidden cash flow problems that only show up too late. Do the hard work now and it will pay off. 

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How to increase AOV

With CAC climbing, selling low-ticket items ($20-25) is nearly impossible. Global ad spend is projected to pass $1 trillion, and rising costs aren’t slowing down. If your LTV isn’t covering CAC, your business will spiral.

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Since subscription model opportunities are generally limited, increasing AOV becomes the key battleground. It’s easier to retain a customer than to acquire a new customer, and it’s easier still to sell to them when they’re in your store or engaged with it. 

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One way to do this is bundling. This strategy helps you:

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1. Increase AOV by selling multiple items together
2. Move inventory faster, reducing carrying costs and freeing up cash

Another tactic is cross-selling and upselling. Studies suggest this can boost sales by 10-30% by recommending additional items while the customer is in buying mode.

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But upselling doesn’t stop at the checkout. Every post-purchase customer interaction, whether it’s a shipping confirmation email, a thank you message or a customer support ticket, is an opportunity for an upsell. For example, brands can include limited-time discounts for complementary products in their post-purchase email sequences or offer one-click upsells when customers track their orders. There are excellent tools available for optimizing these opportunities. 

Key takeaways

• Rethink your metrics. The 3:1 LTV:CAC rule doesn’t work for ecommerce. Instead, focus on gross-margin based calculations to account for high COGS and delivery costs.
• Prioritize profitability. Every SKU should be profitable on its own. Avoid cross-financing weak products and track real-time financials to stay ahead.
• Optimize AOV. With rising CAC, selling cheap items is difficult to sustain. Use bundling, upselling and cross-selling to increase order value and improve cash flow.

At the end of the day, you need accurate financials to make smart pricing decisions and plan your path to profitability. Finaloop can help by providing real-time accurate bookkeeping, including SKU level insights.  This will help you make critical business decisions.  

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Stay on top of your numbers – they make all the difference.