guideFinancial Modeling
Unit Economics 101
Master CAC, LTV, payback period, and gross margin. This guide explains each metric with plain-language definitions, calculation formulas, and the benchmarks investors use to evaluate your business model.
Why Unit Economics Matter
Unit economics tell investors whether your business model is fundamentally sound — can you make more from a customer than it costs to acquire them?
CAC — Customer Acquisition Cost
Total sales & marketing spend ÷ New customers acquired in the same period. Include salaries, ad spend, tools, and events.
LTV — Lifetime Value
For subscription: ARPU ÷ Churn Rate. For transactional: Average order value × Purchase frequency × Customer lifespan.
The LTV:CAC Ratio
Investors generally look for LTV:CAC > 3:1. A payback period under 18 months is strong for early-stage SaaS.
Gross Margin
Revenue minus COGS ÷ Revenue. SaaS businesses typically target 70–80%+ gross margin. This is what funds everything else.