Don’t lie to yourself about the value of your customers. When calculating your customer’s lifetime value, you need to include all relevant costs–including ones you’ve likely missed.

When evaluating direct-to-consumer e-commerce businesses to acquire, one of the metrics we of course look at is LTV to CAC ratio, or the ratio of the lifetime value of a customer in profit dollars to the cost of acquiring a customer. A brand’s incremental CAC or ROAS can sometimes be difficult to calculate but the LTV part is supposed to be fairly straightforward.

Unfortunately, it’s not, at least for most brands we talk to. Usually, brands are not trying to hide the ball from us; they’re just not thinking through all of their variable costs properly.

For example, everyone always includes their product cost of goods and end-customer shipping costs. But here’s a non-comprehensive list of other variable costs you should be including: Freight Fulfillment Average fulfillment center storage Credit card processing fees Credit card chargebacks lost plus penalties Tariffs Sales tax (really should be considered a revenue reduction) Customer service (this is definitely a variable cost even if it’s not treated as one) Return shipping Return and restocking processing Shopify (sometimes fixed, sometimes not) Other variable software costs

It’s the rare brand that properly accounts for all of their variable costs. But this really matters. If you’re consistently off on understanding your costs by even 5%, that could lead to mistakes. For one, if you don’t know or consistently think about a cost that you’re paying, you’re much less likely to try to reduce it somehow. And if you’re wrong about what your effective contribution margins are, you are much more likely to overspend on marketing past the point of incremental profitability.

Let me know in the comments if there are any other variable costs I missed. And if you’re a DTC e-commerce brand thinking through this or anything else, DM me to chat any time.