What it calculates

Unit economics measures the profit and loss of a single customer or transaction - what it costs to acquire, what it earns over its life, and how long the payback takes. It answers whether growth makes the business better or worse.

How it is calculated

Customer acquisition cost is total sales and marketing spend in a period divided by customers acquired in it. Lifetime value is gross profit per customer per period multiplied by the expected lifetime, which for a subscription is one divided by the periodic churn rate, discounted where the horizon is long. The LTV to CAC ratio compares the two, and payback period is CAC divided by gross profit per period.

How to read the result

An LTV to CAC ratio around 3 or above is the usual benchmark, but payback period matters more for cash: a business with strong LTV and a 30-month payback still runs out of money while growing. Use gross profit, not revenue, in the lifetime value calculation - a business with 30% margins and one with 80% margins have very different economics at identical revenue. Segment the numbers, because a healthy blended ratio routinely hides one channel that is deeply unprofitable and another subsidising it.

Worked example

Sales and marketing of 600,000 acquiring 400 customers gives a CAC of 1,500. Monthly gross profit of 120 per customer with 2% monthly churn implies a 50-month lifetime and an LTV of 6,000. The ratio is 4.0 and payback is 12.5 months.

Common questions

Should LTV use revenue or gross profit?

Gross profit. Lifetime revenue ignores the cost of serving the customer, which flatters low-margin businesses enormously. Some practitioners go further and use contribution after support and success costs, which is more conservative and usually more honest.

Why is payback period more important than the LTV to CAC ratio?

Because it determines how much cash you burn to grow. A long payback means every new customer is a financing decision, and the faster you grow the more capital you need, regardless of how attractive the lifetime value eventually looks.

Should CAC include salaries or only advertising?

Fully loaded CAC includes sales and marketing salaries, tools and overhead, not just media spend. Paid-only CAC is useful for optimising channels but understates the true cost of acquisition, sometimes by a factor of two or more.