Whether each customer makes you money — and whether growing makes things better or just makes the hole bigger, faster.
CAC — Customer Acquisition Cost. Total sales and marketing spend ÷ customers acquired.
LTV — Lifetime Value. The gross profit you expect from one customer over the whole relationship.
Payback period — how many months of gross profit it takes to repay the CAC.
Together they answer: does one customer make money, and how long does that take?
Because if unit economics are negative, growth makes things worse. Every new customer costs more than they bring, so scaling just gets you to zero faster while looking impressive on a chart.
And because LTV governs value while payback governs cash. A business with a wonderful LTV and a 24-month payback can still run out of money, because it funds every customer for two years before breaking even on them.
A SaaS company: $50/month, 80% gross margin, average customer stays 20 months. Last month they spent $4,000 on ads and sales and acquired 20 customers.
CAC = $4,000 ÷ 20 = $200
Monthly gross profit per customer = $50 × 0.8 = $40
LTV = $40 × 20 months = $800
LTV:CAC = $800 ÷ $200 = 4:1 — healthy; 3:1 or better is the common benchmark.
Payback = $200 ÷ $40 = 5 months — good; under 12 months is generally comfortable.
Now change one thing: customers stay 5 months instead of 20. LTV drops to $200, LTV:CAC becomes 1:1, and the business no longer works at all — with the same product and the same price. Retention is doing most of the work here.
The most common error by far is calculating LTV on revenue instead of gross profit. Using $50 × 20 = $1,000 instead of $800 overstates it by 25% — and much more in a low-margin business.
The second: excluding founder time and salaries from CAC. If you spend three weeks selling to a customer, that has a cost, and pretending it is free makes early CAC look wonderful and later CAC look like a regression when it is just honest.
The third: computing LTV from a guessed lifetime before you have enough history to know it. Say so when the number is an estimate.
All sales and marketing costs for a period — ads, tools, salaries, your own time — divided by customers acquired in that period.
Monthly revenue per customer × gross margin. Use gross profit, never revenue.
1 ÷ monthly churn rate. At 5% monthly churn, the average lifetime is 20 months. If you lack history, say the number is an estimate.
LTV = monthly gross profit × lifetime. Then LTV ÷ CAC. Aim for 3:1 or better.
CAC ÷ monthly gross profit. Under 12 months is comfortable; over 18 means you need serious cash to grow.
A blended CAC hides everything useful. One channel is usually far better than the average, and that is where the next dollar should go.
Once you have enough customers for the numbers to mean anything — roughly 20 or more — and before spending meaningfully on acquisition.
Do not calculate these with five customers and three months of history. The lifetime estimate will be almost pure guesswork, and a confident wrong LTV leads to confident wrong spending.
Apply this to your own startup in My Full Journey (free account).