The core calculations
CAC (customer acquisition cost): total sales and marketing spend in a period, divided by new customers acquired in that period. Include everything that contributes to acquisition, ad spend, sales salaries, marketing tools, content production, events.
LTV (lifetime value): average monthly revenue per customer multiplied by gross margin, divided by monthly churn rate. For a SaaS customer paying $500/month with 80% margin and 2% monthly churn, LTV is $500 × 0.80 / 0.02 = $20,000.
LTV:CAC ratio: divide LTV by CAC. 3:1 is the benchmark for healthy economics. Above 3:1 is strong. Below 3:1 means acquisition is too expensive or retention is too weak. Above 5:1 may actually signal underinvestment in growth.
The variables that drive the math
Four main levers: increase average revenue per customer, decrease churn, decrease CAC, improve gross margin. Each lever has different difficulty and different impact, and most companies can improve at least two of them through focused work.
Expansion revenue from existing customers is usually the highest-leverage improvement. Getting existing customers to spend 10% more is cheaper than acquiring new customers. This is why net retention above 100% is so valuable, it multiplies the LTV without additional CAC.
Reducing churn compounds. A 1% monthly churn gives 100-month lifetime. A 2% monthly churn gives 50-month lifetime, half the LTV. Small churn improvements produce large LTV improvements because the math is exponential.
Payback period
Payback is how long it takes a new customer to repay their acquisition cost in gross profit. CAC divided by monthly gross profit per customer. A $2,400 CAC at $200 monthly gross profit is 12 months payback.
Payback matters more than LTV for cash planning. LTV is theoretical; payback is real cash flow timing. A company with great LTV but 36-month payback has a cash flow problem because it takes 3 years to recover acquisition costs.
Under 12 months payback is excellent. 12-18 months is good. 18-24 months is acceptable for high-growth companies. Over 24 months starts to strain cash flow unless you have deep pockets.
Actually improving unit economics
Start with the biggest leak. If churn is 5% monthly, fixing churn has the biggest impact. If CAC is $10K for a $2K/month product, fixing CAC has the biggest impact. Work on the biggest problem first rather than spreading effort across all four levers.
Segment the analysis. Enterprise customers often have different economics than SMB customers. Customers in different geographies retain differently. Analyzing by segment reveals where the economics are already good and where they are weak.
The goal is not perfect unit economics immediately. It is an improving trend. A company with 2.5:1 LTV:CAC trending to 4:1 over 18 months is more valuable than one at stable 3:1. Investors reward the direction of travel, not just the current level.