Unit economics answer one question: do you make money on each customer? If the answer is no, growth does not fix it — growth accelerates the losses. If the answer is yes, growth is fuel.
Three numbers tell the story. You can calculate all three in under five minutes.
Number 1: Customer Acquisition Cost (CAC)
Definition: The total cost to acquire one paying customer, including ads, sales time, tools, and any other spend directly attributable to getting someone to pay.
Formula: CAC = Total acquisition spend ÷ Number of new paying customers (in the same period)
Example: You spent $600 on ads, $200 on tools, and 20 hours of sales time (valued at $50/hour = $1,000) in January. You acquired 15 paying customers. CAC = ($600 + $200 + $1,000) ÷ 15 = $120 per customer.
Common mistake: Not counting your own time. If you spent 20 hours on outreach, that is a cost — even if you did not pay yourself. Value founder time at the rate you would pay someone else to do the same work.
Number 2: Lifetime Value (LTV)
Definition: How much gross profit one customer generates over their entire relationship with your product, before they churn.
Formula: LTV = Average Revenue Per User (ARPU) × Average Customer Lifetime × Gross Margin
Calculating average customer lifetime: If you have monthly churn data, average lifetime = 1 ÷ monthly churn rate. Example: 5% monthly churn → average lifetime = 1 ÷ 0.05 = 20 months.
Example: A $29/month SaaS with 5% monthly churn and 80% gross margin. ARPU = $29. Average lifetime = 20 months. LTV = $29 × 20 × 0.80 = $464.
Number 3: LTV/CAC Ratio
Definition: How much value a customer generates relative to how much it costs to acquire them. This is the single most important number in your business.
Thresholds:
- LTV/CAC > 3: Healthy. Each customer generates three times what you spent to acquire them. You can invest in growth.
- LTV/CAC 1–3: Survivable but needs work. Either increase prices, reduce churn, or find cheaper acquisition channels.
- LTV/CAC < 1: You are losing money on every customer. Growing the business will accelerate losses, not fix them.
Continuing the example: LTV = $464. CAC = $120. LTV/CAC = 3.9 — healthy. But if your CAC were $500 (e.g., from expensive paid ads), LTV/CAC = 0.9 — you are losing money on every customer.
A worked example: $29/month SaaS
Let's walk through a complete example:
- Monthly price: $29
- Monthly churn: 5%
- Gross margin: 80% (after hosting, payment processing, and support costs)
- Monthly ad spend: $400
- Monthly founder sales time: 10 hours × $50/hour = $500
- New customers per month: 8
CAC = ($400 + $500) ÷ 8 = $112.50
Average lifetime = 1 ÷ 0.05 = 20 months
LTV = $29 × 20 × 0.80 = $464
LTV/CAC = $464 ÷ $112.50 = 4.1 — healthy.
Now what happens if churn doubles to 10%?
Average lifetime = 1 ÷ 0.10 = 10 months
LTV = $29 × 10 × 0.80 = $232
LTV/CAC = $232 ÷ $112.50 = 2.1 — survivable but under pressure.
The difference between 5% and 10% monthly churn cut LTV in half. This is why the Three-Signal PMF Framework prioritizes retention before acquisition — leaky buckets do not fill.
When to calculate unit economics
- Before you scale: Growing a business with bad unit economics accelerates losses. Check the numbers before increasing ad spend or hiring.
- Every month: Unit economics shift as you change pricing, channels, or product. Monthly tracking catches problems early.
- Before raising: If you are considering fundraising, investors will ask for these numbers. Know them before the meeting.
How to improve bad unit economics
If your LTV/CAC is below 3, you have three levers:
- Increase LTV: Raise prices (see pricing guide), add upsells, or reduce churn by improving the product.
- Decrease CAC: Find cheaper acquisition channels (organic content, referrals, community), improve conversion rates, or narrow your audience to higher-intent buyers.
- Improve gross margin: Reduce hosting costs, automate support, or use a Solo OS to handle operations at lower cost.
Beyond the basics
Unit economics are the foundation. The full financial picture includes churn rate, magic number (sales efficiency), and gross margin analysis. The SaaS Math Cheat Sheet covers all five numbers with formulas and thresholds.
For cash planning, the runway guide explains how to calculate stage-to-stage runway and survival runway from your unit economics.
MoatKit's Financial Intelligence pathway covers unit economics, runway management, and the five key SaaS metrics in 15 lessons over three weeks. See the curriculum.