Calculate the core unit economics of your business: Customer Acquisition Cost (CAC), Lifetime Value (LTV), LTV:CAC ratio and payback period. Find out if your business model is fundamentally sound before scaling.
Unit economics answers the fundamental question: does this business make money on each customer, before any fixed costs? If acquiring a customer costs more than they ever return — or if the payback period extends beyond 12–18 months — no amount of marketing spend or product improvement will make the business viable at scale. Understanding unit economics is the difference between a scalable business and one that grows its losses faster than its revenue.
Total sales and marketing spend divided by new customers acquired in the same period. Includes all costs: ad spend, salaries of sales and marketing staff, agency fees, tools and software. Undercounting CAC is the most common mistake — founders count ad spend but forget salesperson salaries, which are often the dominant acquisition cost.
LTV = (Average Revenue per Customer per Month × Gross Margin) ÷ Monthly Churn Rate. Example: £150 ARPU, 60% gross margin, 4% monthly churn: LTV = (£150 × 0.60) ÷ 0.04 = £2,250. LTV is profoundly sensitive to churn — halving churn from 8% to 4% doubles LTV. Churn reduction is usually the highest-ROI growth investment.
The industry minimum for a viable subscription business is LTV ≥ 3 × CAC. Below 3x, the business cannot sustain profitable acquisition at scale. Payback period = CAC ÷ Monthly Gross Contribution per Customer. Under 12 months is excellent; 12–18 months is good; above 18 months is concerning for cash-flow-constrained businesses.
At 4% monthly churn, average customer lifetime = 25 months. At 2% churn: 50 months. At 8% churn: 12.5 months. Cutting churn in half doubles LTV — making every existing and future customer twice as valuable. This is why the best SaaS businesses obsess over net revenue retention above all other metrics.
The industry standard minimum for a viable subscription business is 3:1 — each customer returns at least 3× what it cost to acquire them. Above 5:1 is excellent and indicates you could profitably invest more in acquisition. Below 1:1 is fundamentally broken — you lose money on every customer, regardless of volume. Between 1:1 and 3:1 is marginal — the business is technically viable but insufficient to attract investment or scale profitably.
CAC = Total Sales & Marketing Spend / New Customers Acquired (in the same period). Include all costs: advertising spend, salaries of sales reps and marketing staff, agency fees, sales tools and CRM costs. Many founders undercount CAC by including only ad spend. If your marketing team costs £5,000/month and generates 20 new customers, your CAC is £250 before any ad spend.
CAC payback = CAC / Monthly Gross Contribution per Customer. Monthly gross contribution = ARPU × Gross Margin. If CAC is £200 and monthly gross contribution is £50: payback = 4 months. Under 12 months is excellent — you recover acquisition costs quickly, enabling reinvestment in growth. Above 18 months is concerning for capital efficiency. Enterprise businesses with larger contracts often have 18–24 month payback periods but compensate with higher contract values and lower churn.