What unit economics tell you
Unit economics answers the question every investor asks first: does your business make money on each customer before fixed costs? A business can grow quickly and still be fundamentally broken if the margin per customer is negative, or if it costs more to acquire a customer than that customer ever pays back.
The three numbers that matter most are contribution margin (what is left after variable costs), LTV:CAC ratio (how much you earn versus how much you spend to acquire), and CAC payback period (how long before each customer pays back their acquisition cost). Together they tell you whether you have a business worth scaling.
The core formulas
Contribution margin = Revenue per unit − Variable costs per unit
Gross margin % = Contribution margin ÷ Revenue × 100
LTV (product) = Contribution margin × Purchases/year × Customer lifetime (years)
LTV (SaaS) = Monthly contribution margin ÷ Monthly churn rate
LTV:CAC ratio = LTV ÷ CAC
CAC payback (months) = CAC ÷ Monthly contribution margin
Net profit per customer = LTV − CAC
LTV should be calculated on contribution margin, not revenue. Using revenue overstates LTV and understates how much work it takes to recoup CAC. Always use the margin-based LTV when presenting to investors.
LTV:CAC benchmarks by stage
| LTV:CAC ratio | CAC payback | Assessment | Investor signal |
|---|
| > 5:1 | < 6 months | Exceptional | Expand marketing aggressively |
| 3:1 – 5:1 | 6–12 months | Healthy | Series A / B fundable |
| 1:1 – 3:1 | 12–24 months | Marginal | Improve before scaling |
| < 1:1 | > 24 months | Broken | Do not scale |
Frequently Asked Questions
What is a good LTV:CAC ratio?+
A ratio of 3:1 is the widely-cited minimum benchmark for a healthy SaaS or subscription business, meaning for every dollar spent acquiring a customer you earn three dollars of lifetime value. Below 3:1 typically indicates you are spending too much to acquire customers, earning too little per customer, or losing them too quickly. Above 5:1 can indicate underinvestment in growth. Venture investors generally want to see 3:1 or better before funding growth. For ecommerce and product businesses the threshold varies more by category and margin structure, but the same principle applies: LTV must materially exceed CAC or the business loses money on every customer at scale.
What is the CAC payback period and why does it matter?+
CAC payback is the number of months it takes for the contribution margin from a customer to equal the cost of acquiring them. A 12-month payback means you break even on each new customer after one year and everything after that is profit. Payback period matters because it is a direct measure of working capital intensity. A business with a 24-month payback needs to fund two years of customer costs before seeing a return, which requires significant capital. Businesses with payback under 6 months can effectively self-fund growth from customer revenue. Most investors want to see payback under 12 months at Series A and under 18 months at Seed.
What is contribution margin and how is it different from gross profit?+
Contribution margin is revenue minus variable costs only. Gross profit subtracts cost of goods sold as reported on an income statement, which can include some fixed costs allocated to production. For unit economics purposes, contribution margin is more useful because it isolates exactly what each additional unit contributes to covering fixed costs and generating profit. In a SaaS business, contribution margin per customer typically includes hosting, payment processing, and customer success costs that scale with customer count, but excludes R&D, G&A, and sales team salaries which are fixed regardless of customer volume.
How do I calculate LTV for a SaaS business?+
The standard SaaS LTV formula is monthly contribution margin divided by monthly churn rate. If your contribution margin per customer is $70 per month and your monthly churn is 3%, LTV is $70 divided by 0.03 which equals $2,333. This assumes an infinite geometric series as customers churn out continuously. The formula works because average customer lifetime in months equals 1 divided by monthly churn rate. If you have expansion revenue (upsells), use net revenue retention to adjust your effective churn downward, which increases LTV. A business with 110% net revenue retention effectively has negative churn and a theoretically infinite LTV.
Why do investors discount LTV calculations?+
Investors typically apply a discount rate to LTV projections for three reasons. First, revenue earned in year three is worth less than revenue earned today due to the time value of money. Second, churn assumptions are often optimistic and small errors compound over a multi-year lifetime calculation. Third, customer cohort behaviour tends to deteriorate over time as early adopters are replaced by customers with lower engagement and willingness to pay. Sophisticated investors calculate LTV using a discounted cash flow approach with a discount rate of 10% to 20% per year, which significantly reduces stated LTV compared to undiscounted calculations. This calculator uses undiscounted LTV for simplicity.
How can I improve my unit economics without raising prices?+
There are four levers: reduce variable costs by renegotiating supplier and fulfilment contracts or moving to lower-cost infrastructure; reduce CAC by improving conversion rates on existing channels rather than spending more; reduce churn by improving onboarding and customer success, which increases LTV without touching revenue per customer; and increase purchase frequency or expansion revenue through upsell and cross-sell programmes. For most early-stage businesses, reducing churn has the highest leverage on LTV because even a 1 percentage point reduction in monthly churn from 4% to 3% increases LTV by 33% without any change to pricing or costs.