Last updated: 31 October 2026
Unit economics compare customer value to acquisition cost. Calculate CAC as sales and marketing spend divided by new customers, LTV as ARPA times gross margin divided by churn, and payback as CAC divided by monthly ARPA times gross margin.
What are unit economics?
David Skok’s guiding question is whether you can make more profit from customers than it costs to acquire them. That is the heart of unit economics. It is not enough to grow revenue if each customer costs too much to win or leaves too quickly. The three essentials are acquiring customers, retaining customers, and monetising customers. Acquisition asks how much you spend to bring in one customer. Retention asks how long that customer stays and whether revenue expands or shrinks over time. Monetisation asks how much gross profit each customer produces. Together, these three areas show whether a startup’s model is sound before it scales.
How do you calculate CAC?
CAC is total sales and marketing spend in a period divided by new customers acquired in that period. The period must match on both sides. If you spend £27,000 on sales and marketing in a month and acquire 30 new customers in that same month, CAC is £900. This is a simple average, so it hides differences between channels, cohorts and customer types. Salaries should be included: leaving them out understates CAC and makes payback look faster than it is. Blending free and paid customers also distorts the number, because free users do not carry the same acquisition cost. For a clearer view, separate paid acquisition from organic or free sign-ups, and track CAC by channel or segment where possible.
How do you calculate LTV?
LTV is the profit expected from a customer over the relationship. It is built from ARPA, gross margin and churn rate. The standard simplification used here is LTV = ARPA x gross margin / churn rate, using the same time period throughout. ARPA is average revenue per account. Gross margin matters because revenue is not profit; only the gross profit left after direct costs can pay back acquisition spend. Churn rate measures how quickly customers leave. In the worked example, ARPA is £100 a month, gross margin is 80%, and monthly churn is 2%, so LTV = £100 x 0.8 / 0.02 = £4,000. Customer churn and revenue churn differ. Revenue churn can be negative when expansion revenue from existing customers exceeds revenue lost to churn. Gross margin also varies by product. AI products can have much lower gross margin than traditional SaaS, which shrinks LTV even when revenue looks similar.
What is a good LTV to CAC ratio?
According to Skok, the best SaaS businesses have LTV:CAC higher than 3, and sometimes 7 or 8. Using the worked examples, £4,000 divided by £900 gives 4.4. That suggests the model clears the common 3x threshold, but the ratio should not be read in isolation. The ratio depends on the accuracy of LTV: if churn is underestimated, gross margin is overstated or CAC excludes costs, it will look better than reality.
How do you calculate CAC payback?
Payback in months is CAC divided by ARPA times gross margin per month. This is the number of months needed to recover the cost of acquiring a customer. Skok notes that many of the best SaaS businesses recover CAC in 5–7 months. In the worked example, £900 divided by (£100 x 0.8 = £80) equals 11.25 months. That is longer than the 5–7 month range, so even with an LTV:CAC ratio above 3, cash recovery takes almost a year.
Common mistakes
Common mistakes include using revenue instead of gross profit, ignoring churn, leaving salaries out of CAC, and blending free and paid customers. Using revenue overstates LTV because direct costs are ignored. Ignoring churn overstates LTV because customers are assumed to stay longer than they do. Leaving salaries out of CAC understates acquisition cost. Blending free and paid customers mixes very different economics into one average. Customer churn and revenue churn differ, and negative churn can occur when expansion exceeds lost revenue. Gross margin of AI products can be much lower than SaaS, which shrinks LTV.
| Metric | Formula | Worked example |
|---|---|---|
| CAC | £27,000 / 30 new customers | £900 |
| LTV | £100 x 0.8 / 0.02 | £4,000 |
| LTV:CAC | £4,000 / £900 | 4.4 |
| Payback | £900 / (£100 x 0.8) | 11.25 months |
Frequently asked questions
What is CAC?
CAC is total sales and marketing spend in a period divided by new customers acquired in that period. It measures the average cost of winning one customer.
How do you calculate LTV?
LTV equals ARPA multiplied by gross margin, divided by churn rate, using the same time period. It estimates the gross profit a customer is expected to generate over the relationship.
What is a good LTV:CAC ratio?
According to Skok, the best SaaS businesses have LTV:CAC higher than 3, and sometimes 7 or 8. A ratio of 4.4 from the worked example clears the common 3x threshold.
How long should CAC payback take?
Skok says many of the best SaaS businesses recover CAC in 5–7 months. Payback is calculated as CAC divided by monthly ARPA times gross margin.
Why does gross margin matter for LTV?
Gross margin matters because LTV uses profit, not revenue. AI products can have much lower gross margin than SaaS, which reduces LTV.
Sources
Figures and prices were checked on 31 October 2026; check the linked sources before relying on them. This article is general information, not tax, legal or investment advice.
