Unit Economics Calculator

Unit economics = The profitability of a single customer or unit. This is the foundation of every sustainable business. If you lose money on each customer, you can’t grow your way to profitability.

Interactive Calculator

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What Are Unit Economics?

Unit economics measure the profit/loss from acquiring and serving a single customer.

Core metrics:

• CAC (Customer Acquisition Cost) - What you spend to get a customer
• LTV (Lifetime Value) - Profit a customer generates over their lifetime
• LTV/CAC Ratio - How much value you get per dollar spent
• Payback Period - Time to recover acquisition cost

The fundamental question: Does each customer generate more value than they cost?

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Customer Acquisition Cost (CAC)

The Formula

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

Example:

• Sales & marketing spend: $100,000/month
• New customers acquired: 50
• CAC = $2,000 per customer

What to Include in CAC

Include ALL costs to acquire customers:

✅ Salaries & Commissions:

• Sales team salaries
• Marketing team salaries
• Sales commissions and bonuses
• Recruiter fees for sales hires

✅ Marketing Spend:

• Paid ads (Google, Facebook, LinkedIn)
• Content creation costs
• SEO tools and agencies
• Marketing automation software

✅ Events & Travel:

• Conferences and trade shows
• Sales team travel
• Demo equipment

✅ Tools & Software:

• CRM (Salesforce, HubSpot)
• Marketing tools (Marketo, Mailchimp)
• Analytics tools

❌ Don’t Include:

• Product development costs
• Customer success costs (those go in COGS)
• General overhead not directly tied to acquisition

CAC by Channel

Different channels have different CACs:

Channel	Typical CAC	Best For
Organic search (SEO)	$50-500	Long-term, scalable
Paid search (Google Ads)	$200-2,000	Quick wins, high intent
Social media ads	$100-1,000	Brand awareness, B2C
Content marketing	$100-800	Thought leadership, B2B
Outbound sales	$1,000-10,000	Enterprise, high-ticket
Referrals	$50-300	Best ROI, but limited scale

Key insight: Blended CAC (average across all channels) is what matters, but track by channel to optimize spend.

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Lifetime Value (LTV)

The Formula

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

Or more precisely:

LTV = (ARPU × Gross Margin) ÷ Monthly Churn Rate

Example:

• Annual revenue per customer: $12,000
• Gross margin: 70%
• Customer lifetime: 3 years
• LTV = $12,000 × 0.70 × 3 =$25,200

Understanding Gross Margin

Gross Margin = Revenue - Direct Costs (COGS)

Direct costs include:

• Hosting / infrastructure (AWS, servers)
• Customer support costs
• Product-specific costs
• Payment processing fees

Don’t include:

• Sales & marketing (that’s CAC)
• R&D / product development
• General overhead

SaaS gross margins: Typically 70-85% E-commerce gross margins: Typically 30-50%

Customer Lifetime Calculation

Two methods:

Method 1: From Churn Rate

Customer Lifetime (months) = 1 ÷ Monthly Churn Rate

Example:

• 3% monthly churn → Lifetime = 1 / 0.03 = 33 months

Method 2: Historical Data

• Track actual cohorts
• See how long customers really stay
• More accurate but requires data

Increasing LTV

Four ways to increase LTV:

1. Increase pricing - Most direct, immediate impact
2. Upsell/cross-sell - Expand revenue per customer
3. Reduce churn - Customers stay longer
4. Improve gross margins - More profit per dollar

Example impact:

• Base: $60k revenue, 70$126k LTV
• +10% pricing: $66k revenue → **$138.6k LTV** (+10%)
• -1% monthly churn: 3.8yr lifetime → $159.6k LTV (+27%)

Reducing churn has outsized impact!

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LTV / CAC Ratio

The Golden Rule

LTV / CAC Ratio = Lifetime Value ÷ Customer Acquisition Cost

Benchmarks:

• Under 1x - Losing money on each customer (unsustainable)
• 1-2x - Break-even to barely profitable
• 3x - Good, healthy business ✓
• 4x+ - Excellent, scale aggressively ✓✓

Why 3x minimum?

• CAC only includes sales/marketing, not all costs
• Need cushion for other expenses (R&D, admin, etc.)
• Need profit margin for the business

What Investors Look For

Stage	Acceptable LTV/CAC
Pre-product/market fit	Any (still figuring it out)
Early traction	2x minimum
Growth stage	3x+ required
Scale stage	4x+ for aggressive scaling

Red flag: LTV/CAC under 1x for over 6 months with no path to improvement.

Real Examples

Example 1: Healthy SaaS

• CAC: $3,000
• LTV: $15,000
• Ratio: 5x ✓✓
• Status: Excellent - can scale aggressively

Example 2: Struggling Startup

• CAC: $8,000
• LTV: $6,000
• Ratio: 0.75x ✗
• Status: Losing $2,000 per customer - unsustainable

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CAC Payback Period

The Formula

Payback Period (months) = CAC ÷ (Monthly Revenue × Gross Margin)

Example:

• CAC: $6,000
• Monthly revenue per customer: $500
• Gross margin: 80%
• Monthly gross profit: $400
• Payback = $6,000 /$400 = 15 months

Why Payback Matters

Cash flow impact:

• You spend CAC upfront
• You collect revenue over time
• Until payback, each new customer burns cash

Example:

• Acquire 100 customers/month
• CAC: $5,000 each
• Payback: 12 months
• Cash needed: $5M (before revenue offsets it)

Fast payback = less cash needed to grow.

Benchmarks

Payback Period	Rating	Scalability
Under 12 months	Excellent ✓✓	Can scale aggressively
12-18 months	Good ✓	Can scale with capital
18-24 months	Fair	Slow, capital-intensive
Over 24 months	Poor	Very hard to scale

B2C vs B2B:

• B2C SaaS: Target under 12 months
• B2B SaaS: 12-18 months acceptable
• Enterprise: 18-24 months may be okay (high LTV)

Improving Payback

Three levers:

1. Reduce CAC - More efficient marketing
2. Increase pricing - More revenue per month
3. Charge upfront - Annual contracts instead of monthly

Example:

• Monthly: $100/month → 60 month payback
• Annual: $1,000/year upfront → 6 month payback

Annual pricing dramatically improves cash flow!

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Churn Rate & Retention

Calculating Churn

Monthly Churn Rate = Customers Lost This Month ÷ Customers at Start of Month

Example:

• Start of month: 1,000 customers
• Lost: 30 customers
• Monthly churn: 3%
• Annual churn: 31% (not 36% - compounds)

Churn Benchmarks

Business Type	Good Churn	Average Churn	Poor Churn
B2B SaaS (Enterprise)	Under 1%/mo	1-2%/mo	Over 3%/mo
B2B SaaS (SMB)	Under 2%/mo	2-5%/mo	Over 5%/mo
B2C SaaS	Under 5%/mo	5-7%/mo	Over 10%/mo
E-commerce	N/A	60-70% annual	Over 80% annual

The Compound Impact of Churn

3% monthly churn:

• Month 12: 69% of customers remain
• Month 24: 48% remain
• Month 36: 33% remain

2% monthly churn:

• Month 12: 78% remain (13% better!)
• Month 24: 62% remain (29% better!)
• Month 36: 49% remain (48% better!)

Small improvements compound dramatically!

Negative Churn

Best case: Negative net revenue churn

When expansion revenue (upsells) exceeds lost revenue from churn:

• Churn: Lose $10k/month
• Upsells: Gain $15k/month
• Net: -$5k churn (revenue growing!)

Companies with negative churn can grow without new customers.

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Cohort Analysis

What Is Cohort Analysis?

Track groups of customers from acquisition through their lifetime.

Example: January 2024 Cohort

• 100 customers acquired
• Track revenue/retention month-by-month
• See exactly how profitable this group is

Why Cohorts Matter

Average metrics lie:

• Overall churn might look good
• But recent cohorts could be worse
• Cohorts show trends over time

Example scenario:

• Overall churn: 3%
• 2023 cohorts: 2% churn ✓
• 2024 cohorts: 5% churn ✗
• Problem hidden in averages!

Key Cohort Metrics

Month 0: Acquisition

• Customers: 100
• CAC: $5,000 each
• Total spend: $500k

Month 6:

• Remaining: 85 customers
• Cumulative revenue: $300k
• Cumulative profit: $210k
• Status: Not yet profitable (under $500k)

Month 12:

• Remaining: 72 customers
• Cumulative revenue: $600k
• Cumulative profit: $420k
• Status: Not yet recovered CAC

Month 18:

• Remaining: 61 customers
• Cumulative revenue: $900k
• Cumulative profit: $630k
• Status: Profitable! (exceeded $500k CAC)

Payback: 18 months for this cohort.

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Improving Unit Economics

Strategy 1: Reduce CAC

Tactics:

• Focus on highest-ROI channels (cut underperformers)
• Improve conversion rates (better landing pages, sales process)
• Leverage lower-cost channels (SEO, referrals, content)
• Optimize sales team efficiency

Example:

• Current: $5k CAC across all channels
• Cut worst channels, focus on best
• New CAC: $3.5k (-30%)
• Impact: LTV/CAC from 3x to 4.3x

Strategy 2: Increase Pricing

Why pricing is powerful:

• Immediate impact (next month)
• 10% price increase = 10% LTV increase
• Often less pushback than expected

Example:

• Current: $1,000/year, 70% margin, 3yr lifetime
• LTV: $2,100
• Raise to $1,200/year (+20%)
• New LTV: $2,520 (+20%)

Caution: Test with new customers first, grandfather existing.

Strategy 3: Reduce Churn

Highest leverage but hardest:

• Product improvements (reduce why they leave)
• Better onboarding (get to value faster)
• Proactive customer success (prevent churn)
• Annual contracts (lock in commitment)

Example:

• 5% monthly churn → 20 month lifetime
• Reduce to 3% → 33 month lifetime (+65%!)
• LTV increases 65% with same revenue/margins

Strategy 4: Upsells & Expansion

Add revenue without acquisition cost:

• Additional features/seats
• Higher-tier plans
• Cross-sell related products
• Usage-based expansion

Example:

• Base: $1k/year per customer
• 30% of customers upsell to $2k/year in year 2
• Average revenue: $1.3k/year (+30%)
• LTV increases 30% with no CAC change

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Common Mistakes

Mistake 1: Not Tracking Unit Economics

❌ “We’ll figure it out when we’re bigger”

✅ Track from day 1. You need to know if your model works.

Mistake 2: Using Revenue Instead of Gross Profit

❌ CAC: $2k, Revenue LTV:$10k, Ratio: 5x (wrong!)

✅ With 60% margin, Profit LTV: $6k, Ratio: 3x (correct)

Mistake 3: Ignoring Cohort Differences

❌ “Our churn is 3%” (mixing old and new cohorts)

✅ Track cohorts separately - trends matter

Mistake 4: Optimizing for One Metric

❌ “Let’s get LTV/CAC to 10x!” (by spending nothing on acquisition)

✅ Balance: Good economics + reasonable growth rate

Mistake 5: Not Including All CAC Costs

❌ Only counting ad spend ($50k)

✅ Include salaries, tools, events ($200k total) - real CAC is 4x higher!

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Unit Economics by Business Model

B2B SaaS (SMB)

Typical metrics:

• ACV: $5k-50k
• CAC: $2k-10k
• LTV/CAC: 3-5x
• Payback: 12-18 months
• Churn: 2-5% monthly
• Gross margin: 75-85%

Key challenge: High churn in SMB segment

B2B SaaS (Enterprise)

Typical metrics:

• ACV: $50k-500k+
• CAC: $10k-100k+
• LTV/CAC: 3-6x
• Payback: 12-24 months
• Churn: Under 2% monthly
• Gross margin: 70-80%

Key advantage: Very low churn, high LTV

B2C SaaS / Consumer

Typical metrics:

• ACV: $100-500
• CAC: $30-200
• LTV/CAC: 3-5x
• Payback: 6-12 months
• Churn: 5-10% monthly
• Gross margin: 60-75%

Key challenge: High churn requires constant acquisition

E-commerce / DTC

Typical metrics:

• AOV: $50-200
• CAC: $20-80
• LTV/CAC: 2-4x
• Payback: 3-9 months
• Repeat rate: 20-40%
• Gross margin: 30-50%

Different model: Focus on repeat purchases, not subscription

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Real Examples

Example 1: Slack (Success Story)

Early days metrics (estimated):

• CAC: ~$1,000 (low! mostly organic growth)
• Annual revenue: $100/user
• Gross margin: 80%
• Customer lifetime: 5+ years
• LTV: $400+
• LTV/CAC: 40x+

Why so good? Viral/organic growth, very low CAC.

Example 2: Blue Apron (Struggled)

Peak metrics:

• CAC: $94
• Average order: $58
• Orders per customer: 4-5
• LTV: $250-290
• LTV/CAC: 2.7-3.1x

Barely profitable per customer, thin margins, high churn made scaling difficult.

Example 3: Netflix (Improved Over Time)

2010s:

• CAC: $50-70 (efficient content marketing)
• Monthly revenue: $10
• Customer lifetime: 3-5 years
• LTV: $360-600
• LTV/CAC: 5-12x

Improved over time as brand strengthened and churn dropped.

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Key Takeaways

1. Unit economics must work - Can’t grow into profitability if you lose money per customer

2. Target 3x+ LTV/CAC ratio - Minimum for healthy, scalable business

3. Payback under 12-18 months - Faster payback = easier to scale

4. Churn is the silent killer - Small improvements have huge compounding impact

5. Track cohorts, not just averages - See trends and act early

6. Gross margin matters - Use profit, not revenue, for LTV calculation

7. Four ways to improve:

   • Reduce CAC (more efficient acquisition)
   • Increase pricing (more revenue)
   • Reduce churn (longer lifetime)
   • Expand revenue (upsells)

8. Balance economics and growth - Don’t sacrifice growth for perfect ratios

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Further Resources

• “Unit Economics” by David Skok (For Entrepreneurs)
• OpenView’s SaaS Benchmarks Report - Industry data
• “The SaaS CFO” by Ben Murray - Financial modeling
• ChartMogul - Cohort analysis tool
• ProfitWell - Unit economics tracking

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Understanding your unit economics is the foundation of building a sustainable, scalable business. Use this calculator to model different scenarios and find the path to profitability.