Founder explainer
Unit economics and the LTV:CAC ratio, with a calculator
Unit economics measure whether a business makes money on each unit it sells: each customer, order or subscription. Investors look at them closely because growth on poor unit economics loses more money the faster it goes.
The core measures
- Customer acquisition cost (CAC): sales and marketing spend ÷ new customers won in the same period.
- Gross margin: the share of revenue left after the direct cost of serving customers.
- Lifetime value (LTV): average monthly revenue per customer × gross margin ÷ monthly churn rate.
- LTV:CAC ratio: how many times over a customer repays the cost of winning them.
- CAC payback: months of gross profit needed to recover CAC (CAC ÷ monthly revenue per customer × gross margin).
Worked example
A software product earns ₹2,000 a month per customer at an 80% gross margin, and 2% of customers leave each month. LTV = 2,000 × 0.8 ÷ 0.02 = ₹80,000. If winning a customer costs ₹20,000, LTV:CAC is 4:1 and CAC payback is 20,000 ÷ 1,600 = 12.5 months.
What good looks like
A common rule of thumb for subscription businesses is an LTV:CAC of at least 3:1 and payback within about 12 to 18 months. Much higher ratios can mean a company is under-investing in growth. Treat these as guides: early cohorts are small, churn estimates are noisy, and consumer, marketplace and enterprise businesses differ.
Use cohorts, not averages
Averages blend old and new customers who may behave very differently. Group customers by the month they joined (cohorts) and track how much revenue each cohort keeps over time. If newer cohorts churn faster or spend less, the averages will flatter the business until it is too late. Investors increasingly ask for cohort tables rather than a single LTV:CAC figure.
Beyond subscriptions
For marketplaces, consumer brands and delivery businesses, the key measure is often contribution margin: revenue per order minus every cost that grows with each order, such as product cost, payment fees, delivery, discounts and returns. A business that loses money on each order after these costs cannot fix it with scale. Repeat purchase rates then play the role that churn plays in subscription businesses.
Common mistakes
- Counting only paid-marketing spend in CAC and leaving out sales salaries, tools and agency fees.
- Using revenue instead of gross profit in LTV.
- Extrapolating churn from a few months of data and assuming customers stay for years.
- Blending channels: one profitable channel can hide another that loses money on every customer.
LTV:CAC calculator
- Lifetime value
- 80,000
- LTV:CAC
- 4.0:1
- CAC payback
- 12.5 mo
Any currency; use the same one for revenue and acquisition cost.
Frequently asked questions
- Should LTV use revenue or gross profit?
- Gross profit. Revenue-based LTV overstates what a customer is worth, because serving the customer has a cost.
- What is a good CAC payback period?
- Often under 12 months for small-business software and up to 18–24 months for enterprise contracts with low churn.
- What is a good LTV:CAC ratio?
- A common rule of thumb is 3:1 or better for subscription businesses. Below 1:1, each customer loses money; well above 5:1 can mean the company could invest more in growth.
- How do I calculate churn?
- Monthly churn is the share of customers (or revenue) at the start of a month that is lost by the end of it. Track customer churn and revenue churn separately; upgrades can offset revenue churn.
- Are unit economics important before product–market fit?
- Rough ones, yes, to check the business can ever work. Precise figures matter more once growth is being paid for with significant marketing spend.
Keep learning
Revenue-based financing vs venture debt: which fits your startup
Revenue-based financing is repaid as a share of revenue; venture debt is a term loan alongside equity. How each works, what it costs, and when founders use them.
Startup funding stages: pre-seed to Series C, explained
What each startup funding stage pays for, what investors expect at each step, and how big rounds are in practice, from StartupReader's own funding data.
Pre-money vs post-money valuation, with examples
Pre-money is what a startup is worth before new investment; post-money adds the new money. How to calculate both, investors' ownership and the option pool effect.
Startup dilution calculator
See how much founders own after each round, including option pool top-ups.
Official-source guides: How to get 100% tax exemption under Section 80-IAC · How to get DPIIT startup recognition in India
Written by the StartupReader editorial desk with AI assistance, from standard definitions and the examples worked through above; updated 2026-10-22. Rules on tax and foreign investment change, so check the official sources or an adviser before acting. Spotted something wrong? Tell us.