What Are Unit Economics? Checking Viability with LTV and CAC
The 3:1 LTV/CAC benchmark, 12-month payback, and the formulas
An LTV/CAC ratio of 3:1 or higher is considered a healthy business. CAC Payback Period should ideally be within 12 months. Continuous tracking and improvement of these metrics is necessary for scaling.
Action Steps
1
Measure average revenue per user (ARPU) and churn rate
2
Calculate customer lifetime value: LTV = ARPU / Churn Rate
3
Calculate CAC by dividing marketing cost by new customers
4
Evaluate investment efficiency based on LTV/CAC ratio and Payback Period
Pros
- ✓ Can objectively prove business profitability
- ✓ Most persuasive metric for investors
Cons
- ✗ Early-stage startups may lack data for accurate calculation
- ✗ Wrong LTV predictions can lead to overinvestment
Use Cases
Pricing optimization for SaaS businesses
Comparative ROI analysis by marketing channel