Startup Unit Economics Explained: CAC, LTV, and the Metrics That Matter

"What are your unit economics?"

If this question makes you nervous, you're not alone. Unit economics is one of those topics that sounds complicated but is actually straightforward once you understand the basics.

Here's everything founders need to know.

What Are Unit Economics?

Unit economics measure the profitability of a single "unit" of your business—typically one customer or one transaction.

The core question: Does acquiring a customer generate more value than it costs?

If yes, you have a potentially scalable business. If no, you're burning money with every customer you acquire.

The Key Metrics

1. Customer Acquisition Cost (CAC)

What it is: The total cost of acquiring one new customer.

Formula:

CAC = Total Sales & Marketing Spend / Number of New Customers Acquired

Example:

• Monthly marketing spend: £10,000
• Monthly sales team cost: £15,000
• New customers acquired: 50

CAC = (£10,000 + £15,000) / 50 = £500 per customer

What's included in CAC:

• Paid advertising (Google, Meta, LinkedIn)
• Content marketing costs
• Sales team salaries and commissions
• Marketing tools and software
• Events and sponsorships

What's NOT included:

• Product development
• Customer success (post-acquisition)
• General overhead

2. Customer Lifetime Value (LTV)

What it is: The total revenue you expect from a customer over their entire relationship with you.

Simple formula:

LTV = Average Revenue Per Customer × Customer Lifetime

More accurate formula (for subscriptions):

LTV = (Average Monthly Revenue Per Customer × Gross Margin) / Monthly Churn Rate

Example:

• Average monthly revenue: £100
• Gross margin: 80%
• Monthly churn rate: 3%

LTV = (£100 × 0.80) / 0.03 = £2,667

3. LTV:CAC Ratio

What it is: How much value you generate relative to acquisition cost.

Formula:

LTV:CAC Ratio = LTV / CAC

Example:

• LTV: £2,667
• CAC: £500

LTV:CAC = £2,667 / £500 = 5.3:1

Benchmarks:

Ratio	Interpretation
< 1:1	You're losing money on every customer. Stop.
1:1 - 2:1	Barely viable. Improve unit economics before scaling.
3:1	Healthy. The typical target for SaaS businesses.
5:1+	Excellent. You may be under-investing in growth.

4. CAC Payback Period

What it is: How long it takes to recover your customer acquisition cost.

Formula:

CAC Payback = CAC / (Monthly Revenue Per Customer × Gross Margin)

Example:

• CAC: £500
• Monthly revenue: £100
• Gross margin: 80%

Payback = £500 / (£100 × 0.80) = 6.25 months

Benchmarks:

Payback Period	Interpretation
< 6 months	Excellent
6-12 months	Good
12-18 months	Acceptable for enterprise
> 18 months	Concerning (unless very high LTV)

5. Gross Margin

What it is: Revenue minus the direct costs of delivering your product.

Formula:

Gross Margin = (Revenue - Cost of Goods Sold) / Revenue × 100

What's in COGS for software:

• Hosting/infrastructure costs
• Third-party API costs
• Customer support (sometimes)
• Payment processing fees

Benchmarks:

• SaaS: 70-85% (target 80%+)
• Marketplaces: 60-80%
• E-commerce: 30-50%

Why Unit Economics Matter

For Fundraising

Investors use unit economics to assess:

1. Is this business model viable? (LTV > CAC)
2. Can it scale? (consistent or improving metrics)
3. How efficiently can it grow? (CAC payback, LTV:CAC)

Poor unit economics at scale is unfixable with more funding. Investors know this.

For Decision Making

Unit economics guide operational decisions:

• Should we raise prices? (Increases LTV)
• Should we spend more on marketing? (Only if CAC stays healthy)
• Which channels should we focus on? (Lowest CAC channels)
• Which customers are most valuable? (Highest LTV segments)

For Sustainability

A business with good unit economics can become profitable. A business with bad unit economics cannot—no matter how much revenue it generates.

Common Mistakes

1. Ignoring Fully Loaded CAC

Some founders calculate CAC using only paid advertising. This understates true acquisition cost. Include all sales and marketing expenses.

2. Overstating LTV

Be conservative with LTV calculations:

• Use actual churn data, not projections
• Don't assume customers will upgrade
• Account for discounts and refunds

3. Blended vs Segmented Analysis

Overall CAC might look fine while one channel bleeds money. Segment your analysis by:

• Marketing channel
• Customer segment
• Product line
• Geography

4. Ignoring Payback Period

LTV:CAC of 5:1 sounds great, but if payback is 36 months, you'll run out of cash before seeing returns. Payback period matters for cash flow.

5. Not Tracking Over Time

Unit economics should improve as you:

• Optimise marketing
• Reduce churn
• Increase prices
• Improve operations

Track monthly to identify trends.

Unit Economics by Business Model

SaaS (Subscription)

Key metrics:

• Monthly Recurring Revenue (MRR)
• Annual Recurring Revenue (ARR)
• Churn rate (monthly and annual)
• Expansion revenue

Healthy benchmarks:

• LTV:CAC > 3:1
• CAC Payback < 12 months
• Net revenue retention > 100%
• Gross margin > 75%

Marketplaces

Key metrics:

• Gross Merchandise Value (GMV)
• Take rate
• Supply-side and demand-side CAC
• Repeat purchase rate

Healthy benchmarks:

• Positive contribution margin after 2-3 transactions
• Take rate sustainable for both sides
• High repeat rates

E-commerce

Key metrics:

• Average Order Value (AOV)
• Customer repeat rate
• Contribution margin per order

Healthy benchmarks:

• Positive contribution margin on first order (ideally)
• Clear path to profitability by order 2-3
• Repeat rate > 30%

How to Present Unit Economics to Investors

Be honest. Investors will probe your numbers. Presenting optimistic projections as current reality destroys trust.

Show the trend. If current unit economics are weak but improving, show the trajectory with specific drivers.

Segment the data. "Our enterprise segment has 8:1 LTV:CAC with 4-month payback. SMB is 2:1 with 18-month payback. We're focusing on enterprise."

Explain assumptions. For LTV especially, be clear about churn assumptions and how they're derived.

Acknowledge weaknesses. "Our CAC is higher than we'd like because we're still optimising our paid acquisition. Here's our plan to improve it."

Improving Your Unit Economics

Reduce CAC

• Improve conversion rates (landing pages, sales process)
• Focus on highest-performing channels
• Invest in organic/referral growth
• Improve targeting to reduce waste

Increase LTV

• Reduce churn (better onboarding, support, product)
• Increase prices
• Upsell and cross-sell
• Improve product stickiness

Improve Gross Margin

• Negotiate better vendor rates
• Automate customer support
• Optimise infrastructure costs
• Reduce payment processing fees

The Bottom Line

Unit economics are the foundation of a sustainable business. They answer the fundamental question: Can you make money acquiring customers?

Master these metrics:

• CAC: What it costs to acquire a customer
• LTV: What a customer is worth
• LTV:CAC: The ratio between them (target 3:1+)
• Payback: How long to recover CAC (target <12 months)

Track them monthly. Improve them systematically. Present them honestly to investors.

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