Unit Economics (CAC and LTV)

What is Unit Economics?

Unit economics means looking at your business one customer at a time: what it costs you to win one customer, and how much money that customer brings in before they leave. Two numbers carry the whole idea. CAC (customer acquisition cost) is your total spend on winning customers divided by the number of new customers. LTV (lifetime value) is the gross profit one customer brings in over the whole time they stay with you.

Put them side by side and you get the most honest view of a young business. If a customer costs €40 to win and brings in €35 of profit, every new sale makes you poorer, and growth only digs the hole faster. If they cost €40 and bring in €160, you have found a channel worth feeding. A third number, the payback period, tells you how many months it takes to earn back the CAC, which decides how much cash you need while you grow.

When should you use it?

Use it once you have at least 20 paying customers and one or more channels you spend time or money on. Before that, there is nothing to divide.

• Fits: subscriptions and SaaS (monthly revenue and churn make LTV straightforward), online shops with repeat orders, service businesses with ongoing clients, marketplaces (calculate for each side).
• Fits differently for one-off products: LTV is the gross profit of the first order plus any repeat orders you can actually see in your data.
• Too early: with 5 customers, any churn rate is a guess. Track the inputs now and calculate later.

How do you do it, step by step?

1. Set up a sheet with one tab per month. Rows: each acquisition channel (ads, events, content, referrals, outreach). Columns: money spent, hours spent, new paying customers.

2. Calculate CAC per channel, with and without your time. Money CAC = money spent ÷ new customers. Full CAC = (money + hours × an hourly rate you choose) ÷ new customers. Pick an honest rate, say what you would pay a freelancer for that work. Founders who skip their own time conclude that “free” channels are free.

3. Work out monthly gross profit per customer. Average monthly revenue per customer minus the direct cost of serving them: product cost, shipping, payment fees, software you pay per customer. Gross margin is that profit as a share of revenue.

4. Measure monthly churn. Churn is the share of paying customers who cancel in a month. Customers at the start of the month who cancelled during it ÷ customers at the start. Use an average of at least 3 months; your cohort retention table gives you the same picture in more detail.

5. Calculate LTV and cap it. Expected lifetime in months = 1 ÷ monthly churn. LTV = monthly gross profit per customer × lifetime. With 2% churn the formula promises a 50-month lifetime you have never observed, so cap lifetime at 24 months until you have real data that long.

6. Calculate payback and the ratio. Payback in months = CAC ÷ monthly gross profit per customer. LTV:CAC ratio = LTV ÷ CAC. Investors and founders repeat a rule of thumb that we use too: a ratio of 3 or more and a payback under 12 months means a channel is healthy.

7. Decide per channel. Feed the channels with a good ratio and short payback, fix or drop the rest. Re-run the numbers monthly, because CAC rises as you exhaust the cheapest customers in a channel.

What does a worked example look like?

Say Priya sells a monthly houseplant care kit for €24. Product, packaging, shipping and payment fees cost her €10.80 per box, so she keeps €13.20 gross profit a month per customer, a 55% gross margin.

In September she wins 25 new customers from two channels:

Her monthly churn over three months averages 8%, so expected lifetime is 1 ÷ 0.08 = 12.5 months. LTV = €13.20 × 12.5 = €165.

On money alone, markets look like the clear winner at €15. Counting her weekends, they cost €65 per customer and ads cost €47. Against an LTV of €165, ads give a ratio of 3.5 and markets about 2.5, below the 3:1 line. Payback is about 3.5 months for ads and 5 months for markets.

So Priya keeps the ads running, cuts markets to one a month for the photos and conversations, and asks her market customers about a referral program, since they love the kits and know other plant people.

Which free tools help?

What mistakes should you avoid?

• Using revenue instead of gross profit for LTV. A €24 box with €10.80 of costs is worth €13.20 a month to you, and that is the number to use.
• Leaving out your own time. Unpaid founder hours make labour-heavy channels look cheap. Price them in, even roughly.
• Trusting a tiny churn rate. One cancellation out of 30 customers gives 3.3% monthly churn and a fantasy 30-month lifetime. Cap lifetime and update monthly.
• Blending all channels. A healthy blended CAC can hide one channel that loses money on every customer.
• Treating early numbers as fixed. CAC climbs as a channel matures, and churn changes as your product improves. Recalculate every month.

How do you know it worked?

You have usable unit economics when you can say, for each channel, what a customer costs, what they are worth and how many months it takes to get the money back.

Our rule of thumb for go / no-go: a channel with an LTV:CAC ratio of 3 or more and payback under 12 months earns more of your money and hours. A ratio below 1 means stop or rethink the channel this month. Anything in between deserves one focused fix, like better targeting or a higher price, then a re-check.

What should you do next?

Put CAC, churn and payback into your weekly metrics dashboard so you watch them move. If margins are thin, compare your price against a competitor pricing map before cutting costs. If you plan to raise money, this overview of startup funding stages explains what investors look at in each round. And to test your numbers with an AI co-founder that asks the uncomfortable questions, try the F/MS startup game.

FAQ

What is a good LTV to CAC ratio?

A ratio of 3 to 1 is the common rule of thumb, with payback in under 12 months. Below 1 to 1 you lose money on every customer. Early on, treat the ratio as a direction to watch, since both numbers move as you grow.

How do I calculate CAC with no ad spend?

Count your hours on each channel and multiply by a fair hourly rate, then add any small costs like event tickets or tools. Divide by the new paying customers from that channel. Free channels always cost time, and time is the scarcest thing you have.

How do I calculate LTV for a new startup with little data?

Use gross profit per customer per month times an expected lifetime from your churn rate, and cap the lifetime at 24 months. Re-run it every month as real data replaces guesses. If you have under 3 months of data, write the LTV as a range.

Updated 26 October 2026 · Written by the Fe/male Switch team

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