financial-unit-economics

Calculate CAC by dividing total sales and marketing costs by new customers acquired, then compute LTV as ARPU times gross margin divided by monthly churn rate. Divide LTV by CAC; a ratio of 3:1 or higher indicates healthy unit economics.

A ratio of 3:1 or higher is the standard target, meaning each customer generates three times their acquisition cost. Ratios below 1:1 are unsustainable, 2-3:1 is acceptable but needs optimization, and above 5:1 supports aggressive scaling.

Use the simple formula LTV equals ARPU times gross margin divided by churn rate, but base churn on observed cohort retention rather than assumptions. For new products, cap LTV projections at 12-18 months and weight recent cohorts more heavily.

Fully-loaded CAC includes all sales and marketing costs: ad spend, sales and marketing team salaries, commissions, tools like CRM and analytics platforms, agency fees, and overhead allocation. Excluding sales salaries is the most common underestimation mistake.

A high LTV/CAC ratio with a long payback period (over 18 months) strains cash because capital recovery is slow. Calculate payback as CAC divided by monthly revenue times gross margin, and target under 12 months for sustainable growth.

Avoid scaling when LTV/CAC is below 2:1, payback exceeds 18 months, or gross margin falls under 60% for SaaS or 40% for e-commerce. Growing before unit economics work typically compounds losses rather than fixing them.