Mastering Unit Economics for E-Commerce: Contribution Margins, Payback and Customer Lifetime Value (CLTV)

Over the years operating and partnering with e-commerce businesses—ranging from early-stage Shopify stores to fast-scaling Amazon and DTC brands—one theme has remained consistent: the businesses that win long term are those that understand their unit economics deeply and early.

Not just revenue. Not just growth. But measurable, per-order profitability.

Whether you're selling home-made candles or sophisticated consumer tech, unit economics forces you to answer a question most operators avoid for too long:

“Am I actually making money on every order I deliver? And..how much?”

If the answer is no, think twice before scaling as it may accelerate your losses. Especially in a higher interest rate environment—where capital is no longer cheap or abundant—those losses become a lot harder to fund, and a lot faster to feel.

In this post, we’ll unpack:

• What unit economics really means in the context of e-commerce specifically- and why it’s important to separate new vs repeat customer economics
• How to apply the Contribution Margin level 1 / 2 / 3 framework to analyze order-level profitability
• Understanding payback period
  
• What is Customer Lifetime Value (CLTV) and ways to calculate it

What Is Unit Economics in E-Commerce?

Unit economics is the study of direct revenues and costs tied to a single order.

In this framework, a "unit" = an average customer order, based on your Average Order Value (AOV).

By calculating unit economics, you can:

• Validate if each sale is profitable
• Predict cash flow dynamics as you scale
• Make smarter decisions about pricing, acquisition, and fulfillment
  

✅ Good unit economics = sustainable growth

❌ Bad unit economics = scaling into bankruptcy

Key Terms We’ll Use Throughout This Guide

• Unit Economics: Measures “profitability" at the level of a single unit (usually an order), by comparing the revenue generated with the direct costs incurred.
• Payback Period: The time (or number of orders) it takes to recover your Customer Acquisition Cost (CAC) using contribution margins from customer purchases.
• CLTV (Customer Lifetime Value): The total contribution margin you expect to earn from a customer across their entire relationship with your business—first purchase and all repeat purchases included.
  

These concepts are important to understand as they are core levers that determine whether your e-commerce business can scale profitably and sustainably

The Contribution Margin Framework: CM1, CM2, CM3

To understand e-commerce unit economics, we first have to understand contribution margins, and break it down into three stages. When doing so, we recommend differentiating between new and repeat customer orders at the final stage.

This layered approach gives you clarity into where your profit is made—and where it's leaking.

Contribution Margin Breakdown

Divide the contribution margin with AOV to get the CM%

Why We Split CM3 by Customer Type

We break CM3 into two variants because customer acquisition costs (CAC) and retention costs are fundamentally different:

📌 Most companies we work with treat performance marketing (Meta, Google Ads) as targeting new customers, and allocate email, loyalty, or SMS spend toward engaging their existing base. While attribution isn’t always clean, a reasonable split gives you practical insight into long-term sustainability.

Why This Matters

• Typically, the first purchase often serves to acquire the customer, not generate profit. Especially if the business model is to have high retention / frequent repurchases
• True profitability often emerges in the second and sometimes third repeat purchases.
• Accurately separating CM3 by customer type is critical for modeling:
  • Payback Period
  • CLTV (Customer Lifetime Value)
    

Unit Economics Example: Order-Level Margins

Let’s walk through a simplified unit economics example using this framework.

🔧 Assumptions:

Contribution Margin Calculations

Insight: Why CM3 Split is Essential

• Your first sale may just break even—or worse, lose money.
• Repeat purchases drive the majority of actual profit.
  

This distinction is exactly what allows us to model:

• How many purchases it takes to recover CAC (Payback Period)
• How much value each customer will contribute over time (CLTV)

Payback Period & CLTV: Modeling Profit Over Time

Once you've calculated Contribution Margins for both new and repeat orders, you're ready to model two of the most important strategic metrics in e-commerce:

• Payback Period – how long it takes to recover the cost of acquiring a customer
• Customer Lifetime Value (CLTV) – how much total contribution margin you can expect from a single customer over time
  

These two metrics give you the answer to a critical question: “How long until I stop losing money and start compounding profit?”

Why Payback Period & CLTV Matter

• Payback Period affects cash flow. If it takes too long to recover CAC, you’ll burn through working capital.
• CLTV drives your scaling strategy. The higher your CLTV, the more aggressively you can reinvest into acquisition.

Definitions & Formulas

📌 Payback Period

The time (or number of orders) it takes to recover your Customer Acquisition Cost (CAC) through contribution margin.

For simplicity, we model payback in number of customer orders.

After the first order, the Contribution Margin (CM3):  -$17
After the second order, CM3: -$4 (= -$17 + $13)
After the third order, CM3: $9 (= -$4+$13)

We can see from the calculation and the chart below that the cumulative contribution margin only becomes positive after the third order. Hence, the payback period is 3 orders.

CLTV (Customer Lifetime Value)

CLTV is the total contribution margin (profit after direct costs) a business earns from a customer over the entire relationship. It tells you how much a customer is truly worth to the business, beyond just revenue.

How do you calculate customer lifetime value?
Two ways to calculate CLTV:

1. Actual historical CLTV:
You can calculate the actual contribution margin earned so far from a customer by summing up the profit from their purchases to date.

👉 Limitation: This doesn’t tell you their full potential value if they’re still active. It also doesn’t work well for newer businesses with limited data.

2. Predicted CLTV (forward-looking):
Alternatively, you can estimate CLTV by calculating the present value of all expected future contribution margins from the customer over their projected relationship length.

👉 To calculate this, you’ll need:

• Your contribution margin per purchase
• An assumption or estimate for churn rate, or retention rates (1-churn). In the simplified formula above, a fixed churn rate is used, however for more in-depth forecasting this can be broken down by year based on retention rate changes across cohorts and retention year. 
• A discount rate to account for the time value of money (since future profits are worth less today)
• Since the business likely will grow and inflation may be in place, a growth rate can be included as well (represented by g in the formula above)

Why discount?
Discounting ensures future profits are reflected in today’s dollars, making the estimate more financially sound.

More advanced forecasting methods (e.g., cohort analysis, predictive models) can improve accuracy, but this simple approach is a great starting point.

Benchmarks (E-commerce DTC)

🚩 Warning Signs

• Payback takes longer than your cash flow runway.
• CLTV is inflated by unrealistic assumptions about repeat purchases.
• CAC increases faster than CLTV as you scale (diseconomies of scale in marketing).
  

Final Thoughts: Scaling With Confidence

Unit economics is not only financial exercise. It’s a strategic one.

When you break down contribution margin into CM1, CM2, and CM3—and model new and repeat customers separately—you get the clarity you need to:

• Price confidently
• Invest in marketing efficiently
• Plan cash flow intelligently
• Scale sustainably

Mastering your unit economics equips you to scale with confidence, knowing each customer adds—not erodes—value

📥 Download our Unit Economics Calculator to model your own payback period using your specific inputs.