You're pitching your startup and an investor asks: "What's your LTV/CAC?" If you stumble, it's game over. This guide will teach you to master unit economics like a scale-up CFO.
📌 What you'll learn:
- ✅ The 6 key metrics every founder must know
- ✅ How to calculate CAC, LTV, and the magic ratios
- ✅ Industry benchmarks (B2B SaaS, B2C, marketplace)
- ✅ How to improve your unit economics
- ✅ Common calculation mistakes to avoid
Why Unit Economics Are THE Key Metric
Unit economics answer one simple question: "Are you making money on each customer?"
If the answer is no, no matter how fast you grow — you're digging your grave faster.
"Revenue is vanity, profit is sanity, but cash is king."
— Startup proverb
The 6 Essential Metrics
1. CAC (Customer Acquisition Cost)
Definition: How much you pay to acquire ONE new customer.
// CAC Formula
CAC = (Marketing Spend + Sales Spend) / New Customers
// Example:
January spend:
• Google Ads: $5,000
• Sales salary: $4,000
• Tools (HubSpot, etc.): $1,000
• New customers: 40
CAC = $10,000 / 40 = $250
📋 CAC Benchmarks by Sector (2025)
| Sector | Average CAC |
|---|---|
| B2B SaaS SMB | $200-$500 |
| B2B SaaS Enterprise | $5,000-$50,000 |
| B2C SaaS | $20-$100 |
| E-commerce | $30-$100 |
| Fintech | $100-$500 |
2. LTV (Lifetime Value)
Definition: How much ONE customer brings you over their entire lifetime.
// LTV Formula (simple method)
LTV = ARPU × Gross Margin × Customer Lifetime
// Customer lifetime = 1 / Churn Rate
If monthly churn = 3%
Customer lifetime = 1 / 0.03 = 33 months
// Example:
ARPU = $79/month
Gross Margin = 80%
Customer lifetime = 33 months
LTV = $79 × 80% × 33 = $2,086
💡 LTV with Expansion Revenue
If your customers upgrade over time (upsells, cross-sells), your LTV increases. The best SaaS companies see 20-30% LTV increase from expansion.
3. LTV/CAC Ratio
Definition: The magic ratio every VC knows by heart.
| Ratio | Interpretation | Action |
|---|---|---|
| < 1x | You're losing money on each customer | 🔴 Urgent: reduce CAC or raise prices |
| 1-3x | Fragile business | 🟡 Optimize before scaling |
| 3-5x | Healthy, investable | 🟢 You can start investing in acquisition |
| > 5x | Excellent | 🔵 You're under-investing in marketing! |
4. Payback Period
Definition: How long it takes to recover your CAC.
// Payback Formula
Payback (months) = CAC / (ARPU × Gross Margin)
// Example:
CAC = $250
ARPU = $79/month
Margin = 80%
Payback = $250 / ($79 × 0.8) = 4 months
📋 Payback Benchmarks
- 🟢 < 12 months: Excellent
- 🟡 12-18 months: Acceptable
- 🔴 > 18 months: Cash flow problem
5. Churn Rate
Definition: The percentage of customers you lose each month.
// Monthly Churn Formula
Churn = Customers Lost / Customers at Start of Month
// Example:
Start of January: 1,000 customers
Customers lost in January: 30
Churn = 30 / 1,000 = 3%
📋 Monthly Churn Benchmarks
| Segment | Acceptable Churn |
|---|---|
| B2B SaaS Enterprise | < 1% |
| B2B SaaS SMB | 2-5% |
| B2C SaaS | 5-10% |
6. Net Revenue Retention (NRR)
Definition: How much revenue you keep from your existing base (including expansion).
// NRR Formula
NRR = (Start MRR + Expansion - Churn - Contraction) / Start MRR
// Example:
January MRR (existing cohort): $100,000
Expansion (upsells): +$8,000
Churn: -$3,000
Contraction (downgrades): -$2,000
NRR = ($100,000 + $8,000 - $3,000 - $2,000) / $100,000 = 103%
💡 Why NRR > 100% is Magic
If your NRR is > 100%, you grow even without new customers. The best SaaS companies (Slack, Datadog, Snowflake) have NRR of 120-150%.
How to Improve Your Unit Economics
Reduce CAC
- • Product-led growth: Let the product sell itself (freemium, trials)
- • Content marketing: SEO, blog, YouTube (near-zero CAC)
- • Referral: Your customers bring other customers
- • Optimize conversion: Improve landing pages and onboarding
Increase LTV
- • Reduce churn: Onboarding, customer success, NPS
- • Upsells: Premium tiers, add-ons, usage-based pricing
- • Raise prices: Often underestimated by founders
- • Annual contracts: Commitment = better retention
Common Calculation Mistakes
❌ Forgetting Hidden Costs in CAC
CAC includes ALL acquisition costs: sales salaries, tools, events, content... Not just ads.
❌ Ignoring Churn in LTV
LTV = ARPU × 12 months? No. If your churn is 5%/month, your average customer stays 20 months, not forever.
❌ Confusing Revenue Churn and Logo Churn
You can lose 5 small customers (high logo churn) but gain on large ones that upgrade (negative revenue churn). Measure both.
FAQ: Common Questions
What's a good LTV/CAC for fundraising?
3x minimum, ideally 5x+. Below 3x, VCs consider your business not scalable.
How do I calculate CAC with free channels?
Calculate a blended CAC (all channels combined) AND CAC by channel. Blended shows your average, detail shows where to invest.
My churn is 10%/month, is that bad?
Yes, very. 10%/month = you lose 72% of customers in a year. Top priority: understand why they leave and fix the problem.
Conclusion
Unit economics aren't just metrics to impress VCs. They're the health indicators of your business. Master them.
📋 Are Your Unit Economics Healthy?
- ☐ LTV/CAC > 3x
- ☐ Payback < 12 months
- ☐ Churn < 5%/month (B2B SMB)
- ☐ NRR > 100%
🚀 Calculate Your Unit Economics Automatically
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