Unit Economics: The Math That Makes or Breaks You (CAC, LTV, Payback)

Dollar Shave Club launched in 2012 with a $4,500 video that went viral. They acquired 12,000 customers in 48 hours. Their CAC? Effectively zero. Their LTV? $220 per customer. That 220:0 ratio let them raise $1M, then $10M, then sell to Unilever for $1B in 4 years.

Unit economics separate real businesses from burning piles of cash. You can have amazing growth, a beautiful product, and rave reviews. But if you spend $200 to acquire a customer worth $100, you're running a charity, not a company. I analyzed unit economics for 100+ startups. The ones with LTV:CAC ratios above 3:1 raised bigger rounds at better valuations. The ones below 2:1 struggled to raise at any price.

The Problem: Growth Without Profitability Is a Trap

Most founders celebrate top-line growth. "We hit $100K MRR!" But they ignore the cost of that growth. They're paying $150 to acquire customers who generate $50 in profit. Every new customer makes them poorer.

The Stakes: A DTC brand I advised grew from $50K to $500K monthly revenue in 12 months. Sounds amazing. But their CAC was $80 and their LTV was $60. They lost $20 on every customer. Over 12 months, they burned $2.4M to grow revenue. When the funding dried up, they collapsed. All that growth was worthless.

The Solution: You need to understand and optimize four core metrics: Customer Acquisition Cost (CAC), Lifetime Value (LTV), Payback Period, and Contribution Margin. These metrics tell you if your business model actually works—or if you're just burning cash fast.

What Unit Economics Really Means (And Why It Matters)

Unit economics measure the profitability of a single unit of your business. For SaaS, that's one customer. For e-commerce, that's one order. For marketplaces, that's one transaction.

The Core Question: Does this unit generate more value than it costs to acquire and serve?

| Business Model | The Unit | Key Metrics | |----------------|----------|-------------| | SaaS | One customer | CAC, LTV, payback, churn | | E-commerce | One order | AOV, gross margin, shipping, CAC | | Marketplace | One transaction | Take rate, payment fees, support cost | | Subscription box | One subscriber | CAC, retention, COGS, shipping | | Services | One project | Billable hours, overhead, utilization |

The Math That Matters:

• LTV:CAC ratio should be 3:1 or higher
• Payback period should be under 12 months
• Gross margin should be 60%+ for SaaS, 30%+ for e-commerce
• Monthly churn should be under 5%

If you don't hit these benchmarks, fix your unit economics before you scale. Otherwise, you scale into bankruptcy.

CAC Calculation: The Complete Framework

CAC (Customer Acquisition Cost) is the total cost to acquire one new customer. Most founders calculate this wrong.

The Basic Formula

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

Example:

• Monthly marketing spend: $50,000 (ads, content, events)
• Monthly sales spend: $30,000 (salaries, commissions, tools)
• New customers this month: 80
• CAC = $80,000 ÷ 80 = $1,000 per customer

Blended vs. Paid CAC

Blended CAC: Average across all channels, including organic.

Paid CAC: Only from paid channels (ads, sales, etc.).

| Channel | Customers | Spend | CAC | |---------|-----------|-------|-----| | Paid ads | 40 | $40,000 | $1,000 | | Content/SEO | 20 | $15,000 | $750 | | Referrals | 15 | $5,000 | $333 | | Organic | 5 | $0 | $0 | | Blended | 80 | $60,000 | $750 | | Paid only | 75 | $60,000 | $800 |

Why This Matters: Blended CAC looks better because it includes free organic customers. But you can't scale organic easily. When you double your marketing spend, you'll acquire customers at your Paid CAC ($800), not your Blended CAC ($750).

Fully Loaded CAC

Include everything:

• Marketing spend (ads, content, events, tools)
• Sales salaries and commissions
• Sales tools (CRM, outreach platforms)
• Onboarding costs (implementation, support)
• Overhead allocation (marketing team office, etc.)

Example - SaaS Company:

• Marketing spend: $40,000
• Sales salaries (2 reps): $12,000
• Commissions: $6,000
• Sales tools: $2,000
• Onboarding: $4,000
• Total: $64,000
• New customers: 40
• Fully loaded CAC: $1,600

CAC by Channel

Different channels have different CACs. You need to know this to optimize.

| Channel | CAC | Volume | LTV | LTV:CAC | Verdict | |---------|-----|--------|-----|---------|---------| | Facebook ads | $800 | 50/month | $2,400 | 3.0:1 | Scale | | Google Search | $600 | 30/month | $1,800 | 3.0:1 | Scale aggressively | | LinkedIn ads | $1,200 | 15/month | $2,800 | 2.3:1 | Optimize or cut | | Outbound sales | $1,500 | 10/month | $4,000 | 2.7:1 | Test improvements | | Referrals | $200 | 20/month | $3,000 | 15:1 | Double down | | Events | $2,000 | 5/month | $5,000 | 2.5:1 | Selective attendance |

Insight: Referrals have 15:1 LTV:CAC. Find ways to get more referrals. LinkedIn ads at 2.3:1 are marginal—improve or eliminate.

LTV Calculation: Predicting Customer Value

LTV (Lifetime Value) is the total profit a customer generates over their relationship with you.

The Basic Formula

LTV = Average Revenue per Customer × Gross Margin × Average Customer Lifespan

Example:

• Monthly revenue per customer: $100
• Gross margin: 80%
• Monthly churn: 5% (lifespan = 1 ÷ 0.05 = 20 months)
• LTV = $100 × 0.80 × 20 = $1,600

The Simple LTV Formula

LTV = (ARPU × Gross Margin) ÷ Monthly Churn

Example:

• ARPU (Average Revenue Per User): $100/month
• Gross margin: 75%
• Monthly churn: 4%
• LTV = ($100 × 0.75) ÷ 0.04 = $1,875

Advanced LTV: Accounting for Expansion

If customers upgrade over time, calculate LTV with expansion revenue:

LTV with Expansion = (Initial ARPU + Expansion ARPU) × Gross Margin ÷ Churn

Example - Netflix:

• Initial plan: $15/month (Basic)
• Upgrade rate: 40% upgrade to Standard ($25/month) within 6 months
• Average ARPU after 6 months: $19/month
• Gross margin: 40%
• Monthly churn: 2%
• LTV = ($19 × 0.40) ÷ 0.02 = $380

LTV by Cohort

Customers acquired at different times may have different LTVs. Calculate LTV by acquisition month (cohort).

Example:

| Cohort | Month 1 | Month 3 | Month 6 | Month 12 | LTV (12 mo) | |--------|---------|---------|---------|----------|-------------| | Jan 2025 | $50 | $140 | $260 | $480 | $480 | | Apr 2025 | $50 | $135 | $245 | $410 | $410 | | Jul 2025 | $50 | $120 | $210 | - | $340 (projected) |

Insight: LTV is declining over time. Something changed—maybe a new acquisition channel with lower-quality customers, or product changes affecting retention. Investigate immediately.

The LTV:CAC Ratio: Your North Star Metric

This is the single most important metric in your business.

| Ratio | Assessment | Action Required | |-------|------------|-----------------| | <1:1 | Burning cash | Stop all marketing, fix fundamentals | | 1:1 to 2:1 | Unsustainable | Improve retention or reduce CAC immediately | | 3:1 | Healthy | You can scale marketing aggressively | | 5:1+ | Underinvesting | Increase marketing spend significantly |

Why 3:1 Is the Magic Number

At 3:1, you have enough margin to:

• Cover CAC (1x)
• Fund operations (1x)
• Generate profit (1x)

At 2:1, you're barely breaking even after operational costs. At 1:1, you're losing money on every customer.

Real Examples

Netflix (2015):

• CAC: $60 (blended, heavy on content marketing)
• LTV: $380 (based on $15/month, 2% churn, 40% margin)
• LTV:CAC: 6.3:1
• Action: Scale aggressively, which they did globally

Dollar Shave Club (2014):

• CAC: $25 (viral video + referral)
• LTV: $220 ($8/month, 5% churn, 60% margin)
• LTV:CAC: 8.8:1
• Action: Raised $10M to scale, sold to Unilever for $1B

A Failed DTC Brand (2023):

• CAC: $80 (Facebook ads)
• LTV: $60 ($40 AOV, 40% margin, 2.5 purchases per customer)
• LTV:CAC: 0.75:1
• Action: Should have stopped marketing, fixed product instead

Payback Period: The Cash Flow Reality

Payback period is how long it takes to recover your CAC from a customer's contribution margin.

The Formula

Payback Period = CAC ÷ Monthly Contribution per Customer

Where Monthly Contribution = Monthly Revenue × Gross Margin

Example:

• CAC: $1,200
• Monthly revenue: $150
• Gross margin: 75%
• Monthly contribution: $112.50
• Payback period: $1,200 ÷ $112.50 = 10.7 months

Why Payback Matters More Than LTV:CAC

LTV:CAC tells you if the math works eventually. Payback tells you if you can survive the cash gap.

| Payback Period | Cash Required to Scale | Risk Level | |----------------|------------------------|------------| | 0-3 months | Very low | Very low | | 3-6 months | Low | Low | | 6-12 months | Medium | Medium | | 12-18 months | High | High | | 18-24 months | Very high | Very high | | 24+ months | Extreme | Extreme |

The Cash Flow Problem: You pay $1,000 CAC today. With a 12-month payback, you recover it over a year. If you acquire 100 customers per month, you have a $100,000 cash gap that keeps growing until customers pay back.

Real Example: Spotify's Payback Period

Spotify Premium (2018):

• CAC: $15 (heavy brand marketing, some paid)
• Monthly revenue: $10
• Gross margin: 25% (royalties to artists)
• Monthly contribution: $2.50
• Payback period: 6 months

The Strategy: Spotify could grow aggressively because payback was fast. Even with low margins (25%), the low CAC made it work. They focused on viral growth, playlist sharing, and brand awareness rather than expensive paid acquisition.

Contribution Margin: What You Actually Keep

Contribution margin is the profit per unit after variable costs. It tells you what you have left to cover fixed costs and generate profit.

The Formula

Contribution Margin = Revenue - Variable Costs

Or as percentage: Contribution Margin % = (Revenue - Variable Costs) ÷ Revenue

Variable Costs by Business Model

| Business Model | Variable Costs | NOT Variable | |----------------|----------------|--------------| | SaaS | Hosting, payment fees, support tickets | Engineering, sales, office | | E-commerce | COGS, shipping, payment fees | Marketing, warehouse, staff | | Marketplace | Payment processing, support, refunds | Engineering, marketing | | Services | Contractor costs, materials | Your time, overhead |

Example - E-commerce

Order Details:

• Selling price: $100
• COGS (product cost): $40
• Shipping: $12
• Payment fees (3%): $3
• Packaging: $2
• Total variable costs: $57
• Contribution margin: $43 (43%)

If your CAC is $30, you make $13 per order after acquisition. If your CAC is $50, you lose $7 per order.

Example - SaaS

Customer Details:

• Monthly revenue: $200
• Hosting cost: $15
• Payment fees (2.9%): $6
• Support cost: $20
• Total variable costs: $41
• Contribution margin: $159 (79.5%)

With CAC of $1,200 and monthly contribution of $159, payback period is 7.5 months.

Gross Margin: The Foundation of Everything

Gross margin is contribution margin at the revenue level. It measures how efficiently you deliver your product.

Benchmarks by Industry

| Industry | Good Margin | Excellent Margin | |----------|-------------|------------------| | SaaS | 70-80% | 80%+ | | E-commerce | 30-40% | 50%+ | | Marketplace | 20-30% | 40%+ | | Services | 40-50% | 60%+ | | Hardware | 20-30% | 40%+ | | Media/Content | 50-60% | 70%+ |

Why Gross Margin Matters

Low gross margin means you have less money to cover CAC, sales, and operations.

Example:

• Company A: 80% gross margin, $100 revenue = $80 to spend on growth
• Company B: 30% gross margin, $100 revenue = $30 to spend on growth

Company A can afford higher CAC or longer payback periods. Company B needs to be ruthlessly efficient.

Real Case Study: How Netflix Optimized Unit Economics Over 20 Years

2007: DVD by Mail

• CAC: $40 (heavy marketing, $1 trial)
• Monthly revenue: $18
• Gross margin: 50%
• Monthly churn: 5%
• LTV: $180
• LTV:CAC: 4.5:1
• Payback: 4.4 months

2012: Early Streaming

• CAC: $60 (content marketing, partnerships)
• Monthly revenue: $8
• Gross margin: 30% (high content costs)
• Monthly churn: 8%
• LTV: $90
• LTV:CAC: 1.5:1
• Payback: 25 months

The Problem: Unit economics broke during the streaming transition. Churn spiked as customers tried streaming but didn't stick. Content costs were high. LTV:CAC dropped below 2:1.

The Fix (2013-2015):

1. Invested in original content (lower per-viewer cost at scale)
2. Improved recommendation algorithm (increased engagement)
3. Added family plans (increased ARPU)
4. Expanded internationally (economies of scale)

2017: Mature Streaming

• CAC: $60
• Monthly revenue: $11
• Gross margin: 40%
• Monthly churn: 2%
• LTV: $220
• LTV:CAC: 3.7:1
• Payback: 13.6 months

2023: Global Streaming

• CAC: $60
• Monthly revenue: $16
• Gross margin: 40%
• Monthly churn: 2%
• LTV: $320
• LTV:CAC: 5.3:1
• Payback: 9.4 months

The Lesson: Netflix optimized every component—reduced CAC through brand strength, increased ARPU through pricing and tiering, reduced churn through content investment, and maintained margins through scale.

Real Case Study: How Dollar Shave Club's Unit Economics Enabled a $1B Exit

The Launch (2012): Michael Dubin launched Dollar Shave Club with a $4,500 video that went viral.

The Unit Economics:

• CAC: $25 (mostly viral, some paid)
• Monthly revenue: $8
• Gross margin: 60% (razors cost $3, sold for $8)
• Monthly churn: 5%
• LTV: $96
• LTV:CAC: 3.8:1
• Payback: 5.2 months

The Viral Amplification: The video drove organic growth:

• 12,000 customers in 48 hours
• 25,000 customers in first month
• 1M+ YouTube views (free marketing)
• Effective CAC dropped to $15

The Scale (2013-2015):

• Raised $1M seed, then $9.8M Series A, then $75M Series B
• Invested in paid channels with proven unit economics
• Added products (shave butter, wipes) to increase LTV
• LTV grew to $220 by 2015
• LTV:CAC improved to 8.8:1

The Acquisition (2016): Unilever acquired Dollar Shave Club for $1B in cash.

Why It Worked:

• Low CAC through viral + content marketing
• High LTV through subscription + product expansion
• Fast payback (5 months) meant aggressive growth was sustainable
• 8.8:1 LTV:CAC meant they could outspend competitors on acquisition

The Comparison: Competitor Gillette spent $200M+ annually on traditional advertising with unknown CAC. Dollar Shave Club spent $20M with measurable 8.8:1 return. David beat Goliath through superior unit economics.

Common Unit Economics Mistakes (And How to Avoid Them)

❌ Mistake 1: Ignoring Churn in LTV Calculations

The Error: A SaaS founder calculated LTV as $100/month × 12 months = $1,200. He ignored that 10% of customers churned each month. Actual average lifespan: 10 months. Actual LTV: $800.

Why It Happens: Simple math is easier. Founders want optimistic numbers.

The Consequence: He thought his LTV:CAC was 2.4:1 ($1,200 ÷ $500). It was actually 1.6:1 ($800 ÷ $500). He scaled marketing and burned through $2M before realizing the math didn't work.

✅ The Fix: Always use churn-adjusted LTV. Formula: LTV = ARPU × Gross Margin ÷ Monthly Churn Rate. If you don't have 12+ months of churn data, use conservative estimates (assume 5-8% monthly churn for SaaS).

❌ Mistake 2: Using Revenue Instead of Gross Margin

The Error: An e-commerce founder calculated LTV as $100 (AOV) × 3 purchases = $300. But his gross margin was only 30%. Actual contribution: $90. He spent $80 on CAC, thinking he had $220 profit. He actually had $10.

Why It Happens: Revenue is bigger and feels better. Founders conflate revenue with profit.

The Consequence: He operated at breakeven for 18 months, unable to invest in growth or pay himself. Eventually, competitors with better margins underpriced him.

✅ The Fix: Always calculate LTV using contribution margin or gross profit, not revenue. If you make $100 in revenue but only keep $30 after costs, your LTV is $30.

❌ Mistake 3: Blending CAC Across Channels

The Error: A founder reported blended CAC of $75 (including organic). But when he tried to scale, he bought customers at $150 CAC (paid only). His unit economics fell apart.

Why It Happens: Blended CAC looks better for investor presentations. It's technically true but practically misleading.

The Consequence: He told his board he could scale profitably at $75 CAC. When he 3x'd marketing spend, CAC jumped to $150. Growth stalled. Board lost confidence.

✅ The Fix: Report both blended and paid CAC. Plan scaling based on paid CAC. Track CAC by channel and optimize the ones with best LTV:CAC ratios.

❌ Mistake 4: Calculating CAC Over Too Short a Period

The Error: A founder included 1 month of marketing spend and 1 month of new customers. But his sales cycle was 60 days. The customers acquired this month came from last month's spend.

Why It Happens: Monthly reporting is easier. Founders don't account for sales cycle lag.

The Consequence: His CAC calculation swung wildly month-to-month. One month it looked like $200, next month $600. He couldn't make decisions.

✅ The Fix: Calculate CAC over your full sales cycle. If it takes 60 days from first touch to customer, divide 2 months of spend by 1 month of new customers (acquired in month 2). Or use a rolling 3-month average.

❌ Mistake 5: Ignoring Time Value of Money

The Error: A founder calculated payback period as 18 months and considered it acceptable. But he didn't account for the cost of capital. With 18-month payback and 10% cost of capital, the true cost was much higher.

Why It Happens: Simple payback is easier to calculate. Founders ignore the time value of money.

The Consequence: He raised $5M to fund growth with 18-month payback. The interest and opportunity cost consumed his margins. He would have been better off growing slower or fixing payback period first.

✅ The Fix: Use discounted cash flow for important decisions. A customer with 18-month payback at 10% discount rate costs 15% more than face value. Aim for <12 month payback.

Optimizing Your Unit Economics: The Playbook

Reduce CAC

| Tactic | Expected Impact | Timeline | |--------|-----------------|----------| | Improve conversion rates | 20-50% CAC reduction | 30-60 days | | Focus on organic/viral | 50-90% CAC reduction | 3-6 months | | Optimize paid channels | 15-30% CAC reduction | 30 days | | Increase referrals | 30-50% CAC reduction | 60-90 days | | Reduce sales cycle | 20-40% CAC reduction | 60-90 days | | Better lead qualification | 25-50% CAC reduction | 30 days |

Real Example: A SaaS company improved their landing page conversion from 2% to 5%. Same ad spend, 2.5x more trials, CAC dropped from $400 to $160. LTV:CAC improved from 2.5:1 to 6.25:1.

Increase LTV

| Tactic | Expected Impact | Timeline | |--------|-----------------|----------| | Reduce churn | 20-50% LTV increase | 3-6 months | | Increase pricing | 20-50% LTV increase | 30-60 days | | Add upsells/cross-sells | 30-100% LTV increase | 3-6 months | | Improve onboarding | 20-40% LTV increase | 30-60 days | | Annual plans | 20-30% LTV increase | 30 days | | Retention campaigns | 15-30% LTV increase | 60-90 days |

Real Example: Netflix added DVD/Streaming bundles and then streaming-only tiers. ARPU grew from $8 to $16. Even with flat churn, LTV doubled from $160 to $320.

Reduce Payback Period

| Tactic | Expected Impact | Timeline | |--------|-----------------|----------| | Reduce CAC (see above) | 20-50% faster | Varies | | Increase initial purchase | 20-40% faster | 30 days | | Charge annual upfront | 50-80% faster | 30 days | | Add setup fees | 30-50% faster | 30 days | | Improve time-to-value | 10-20% faster | 60-90 days |

Real Example: A SaaS company offered 2 months free with annual prepay (vs. monthly). 40% of customers chose annual. Average payback dropped from 11 months to 4 months (they got 12 months cash upfront).

Your Unit Economics Dashboard

Track these metrics weekly:

| Metric | Formula | Target | Frequency | |--------|---------|--------|-----------| | Blended CAC | S&M ÷ New Customers | Declining | Weekly | | Paid CAC | Paid S&M ÷ Paid Customers | <75% of LTV | Weekly | | LTV | ARPU × GM ÷ Churn | Increasing | Monthly | | LTV:CAC | LTV ÷ CAC | >3:1 | Weekly | | Payback Period | CAC ÷ Monthly Contribution | <12 months | Weekly | | Gross Margin | (Revenue - COGS) ÷ Revenue | Industry dependent | Monthly | | Monthly Churn | Churned ÷ Total | <5% | Weekly | | Net Revenue Retention | Revenue from existing cohort | >100% | Monthly | | CAC by Channel | Channel S&M ÷ Channel Customers | Optimize top performers | Monthly |

Tools to Track:

• Baremetrics (SaaS)
• ProfitWell (SaaS)
• ChartMogul (SaaS)
• Google Analytics + your CRM (all businesses)
• Excel/Sheets (manual tracking)

Your 30-Day Unit Economics Action Plan

Week 1: Calculate Current State

• [ ] Calculate blended CAC for last 3 months
• [ ] Calculate paid CAC by channel
• [ ] Calculate LTV using actual churn data
• [ ] Calculate payback period
• [ ] Calculate LTV:CAC ratio
• [ ] Time investment: 6-8 hours
• [ ] Success metric: You know your current unit economics

Week 2: Identify Issues

• [ ] Compare your metrics to benchmarks
• [ ] Identify channels with poor LTV:CAC
• [ ] Calculate cohort LTV (is it declining?)
• [ ] Identify highest-churn customer segments
• [ ] Time investment: 4-6 hours
• [ ] Success metric: Clear list of 3-5 problems to fix

Week 3: Quick Wins

• [ ] Pause or fix worst-performing acquisition channels
• [ ] Implement pricing test (10-20% increase)
• [ ] Launch referral program
• [ ] Add annual prepay option with discount
• [ ] Time investment: 8-12 hours
• [ ] Success metric: 2+ initiatives launched

Week 4: Measure and Iterate

• [ ] Review early results from Week 3 initiatives
• [ ] Double down on what's working
• [ ] Kill what's not working
• [ ] Set up automated unit economics dashboard
• [ ] Time investment: 4-6 hours
• [ ] Success metric: LTV:CAC improving or plan to address

Conclusion: Unit Economics Are Your Foundation

You can have the best product, the best team, the best vision. But if your unit economics don't work, you don't have a business—you have a burning pile of cash.

The companies that survive and thrive obsess over these metrics. Netflix knows the LTV of every subscriber cohort. Amazon tracks contribution margin by SKU. Dollar Shave Club built a $1B brand by keeping CAC under $25.

Don't grow into bankruptcy. Fix your unit economics first:

• LTV:CAC ratio above 3:1
• Payback period under 12 months
• Gross margin appropriate for your industry
• CAC declining over time as you optimize

Then scale. Aggressively.

Your next step: Calculate your LTV:CAC ratio right now. If it's below 2:1, stop all paid marketing and fix your fundamentals. If it's above 3:1, scale aggressively. If you don't know the number, spend the next 2 hours figuring it out.

Related Guides:

• Revenue-Based Financing: Non-Dilutive Growth Capital
• Venture Debt: The Secret Weapon of Scalable Startups
• Cash Runway: Planning Your Next 18-24 Months
• Capital Budgeting: Where to Invest Your Limited Cash

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Questions about unit economics for your specific situation? Sarah Mitchell has analyzed unit economics for 100+ startups. Book a free consultation to optimize your metrics.