Why Returning Customer Rate Doesn’t Equal LTV
If I had a dollar for every time a founder said, “Our Shopify returning customer rate is high, so our LTV must be too,” I could probably fund your next inventory order myself. It's one of the most common misconceptions I see in the DTC space—and one of the most dangerous.
Let me be blunt: High Returning Customer Rate ≠ High LTV
Defining the Metric: What Returning Customer Rate Actually Tells You
Let’s start with what the Returning Customer Rate (RCR) actually is. On Shopify, it’s simply the percentage of total customers in a given period who have purchased from you before. That’s it. It doesn’t tell you how much those customers spent. It doesn’t tell you how often they came back. It certainly doesn’t tell you anything about margin. Yet brands often assume a high RCR is a sign of high customer value. Unfortunately, that’s just not the case.
Why RCR Can Be Misleading
Here’s the problem: RCR is a binary metric. A customer either bought again or they didn’t. That simplicity makes it easy to understand but incredibly misleading. Two brands might both have a 40% returning customer rate, but the underlying economics can be worlds apart.
Brand A’s returning customers may place small, low-margin orders that barely cover costs. Brand B’s customers might come back for high-ticket items with strong contribution margins. Same RCR, very different financial outcomes.
The danger here is that RCR can create a false sense of security. You see 45% returning customers and think you’ve nailed retention—but when you zoom into the margin contribution from those returning customers, the truth can be sobering.
The reality is that LTV is not a count of returning people—it's a sum of margin dollars accumulated from their behavior over time. That means order value matters. Frequency matters. And most importantly, your margins matter.
The Real Drivers of LTV
If you're serious about understanding customer value, you need to stop relying on vanity metrics and start tracking the data that actually reflects contribution to your bottom line.
Here are the essential ingredients of true LTV:
How much your returning customers spend per order (AOV)
How often they return to purchase again (purchase frequency)
What margin you earn on each of those purchases (contribution margin before ad spend)
These three factors combine to form the actual dollars your brand retains from each customer over time. When you track them together—especially on a cohort basis—you get a far clearer picture of customer profitability than RCR could ever provide.
What This Means for DTC Brands
The takeaway is simple: don’t let RCR lull you into a false sense of profitability. It might be a nice stat to glance at, but it’s not the metric you should be optimizing for. Instead, shift your focus to contribution-margin-based LTV over specific time windows—30, 60, 90 days—so you can understand not just if customers are coming back, but whether they’re actually valuable when they do.
Without that lens, you risk making growth decisions—like increasing ad spend or doubling down on acquisition—based on surface-level data. And in today’s competitive landscape, that kind of decision-making can burn cash fast.
So the next time someone tells you your high RCR means you have high LTV, take a breath and dig into the numbers. Look past the percentage. Follow the margin. And let the real value of your customers guide your strategy.
Until next time, scale on!
