Unit Economics: CAC, LTV and Payback Period

The question unit economics answers

Not "is the company profitable?" but something more useful at an early stage: if we acquire one more customer, do we make money on them, and how long does it take?

A business with sound unit economics and a net loss is usually a scaling problem. A business with broken unit economics and a net loss is a business model problem. They look identical on a P&L and require completely different responses.

Customer acquisition cost

CAC = Total sales & marketing spend in a period / New customers acquired in that period

The formula is trivial. Getting the numerator right is where it goes wrong.

Fully loaded CAC includes:

• Paid advertising
• Salaries of everyone in sales and marketing
• Sales commissions and bonuses
• Marketing and sales tooling - CRM, automation, analytics
• Agency and contractor fees
• Content production, events, sponsorships

It excludes:

• Product and engineering costs
• Customer support for existing customers
• General overhead not attributable to acquisition

Most founders quote paid-media CAC because it is the number their ad dashboard shows. If a company spends ₹5,00,000 on ads and ₹15,00,000 on a sales team to acquire 50 customers, ad-only CAC is ₹10,000 and fully loaded CAC is ₹40,000. Those two numbers lead to opposite decisions.

Split by channel and by segment. Blended CAC across all channels hides the fact that one channel is excellent and another is destroying money. Enterprise CAC and self-serve CAC should never be averaged together.

Lifetime value

LTV is the total gross profit you expect from a customer across their entire relationship with you.

For a subscription business:

LTV = (ARPA × Gross margin %) / Monthly churn rate

Where ARPA is average revenue per account per month.

Example. ₹8,000 per month, 80% gross margin, 2% monthly churn:

LTV = (8,000 × 0.80) / 0.02 = ₹3,20,000

Three things about this that matter.

Use gross profit, not revenue. Revenue-based LTV overstates value by whatever your COGS is. If you are comparing LTV to CAC, both need to be on a contribution basis.

Churn drives everything. At 2% monthly churn, LTV is ₹3,20,000. At 4%, it halves to ₹1,60,000. At 1%, it doubles to ₹6,40,000. Small changes in the churn assumption produce enormous swings in LTV, which makes LTV the easiest metric on the list to quietly inflate.

Early-stage churn estimates are unreliable. If you have twelve months of data you do not know your long-run churn, and any LTV you calculate is extrapolation. Say so.

A more conservative alternative many investors now prefer: calculate LTV over a fixed window - 24 or 36 months - rather than to infinity. It is less flattering and much harder to argue with.

The LTV:CAC ratio, and why to be sceptical of it

LTV:CAC = LTV / CAC

Conventional reading:

Ratio	Interpretation
Below 1	Every customer loses money. Stop scaling.
1–2	Marginal. Something needs to change.
3	The benchmark most investors expect.
5+	Excellent - or you are underinvesting in growth.

That last row is worth pausing on. A very high ratio is not automatically good news. It frequently means you could profitably spend more on acquisition and are leaving growth on the table.

But the real problem with LTV:CAC is that it is a ratio of two numbers you control the assumptions for. Choose an optimistic churn rate and exclude salaries from CAC, and almost any business clears 3:1. It is the metric most often used to prove a conclusion that was reached first.

Payback period: the number that is harder to fake

CAC payback (months) = CAC / (ARPA × Gross margin %)

Using the numbers above: ₹40,000 / (₹8,000 × 0.80) = 6.25 months.

Payback period is more useful than LTV:CAC for one reason: it is grounded in cash and near-term data rather than a long-run churn assumption.

Payback period	Practical meaning
Under 6 months	Excellent. Growth largely self-funds.
6–12 months	Healthy for SaaS.
12–18 months	Workable, but growth consumes cash.
Over 18 months	Each new customer is a significant cash commitment.
Over 24 months	Very difficult without substantial funding.

This is why payback matters so much when runway is short. If your payback period is fourteen months and you have nine months of cash, then spending on acquisition is actively shortening your life even though every customer is "profitable" over their lifetime. LTV:CAC cannot see that. Payback can.

Contribution margin per customer

The simplest version of all, and a good sanity check:

Contribution margin = Revenue per customer − Variable cost to serve − Amortised acquisition cost

If that is negative, no growth rate fixes it.

Where these numbers usually break

Averaging across segments. A business with brilliant self-serve economics and terrible enterprise economics can look mediocre in aggregate and be two businesses, one of which should be stopped.

Ignoring expansion revenue. If existing customers grow their spend, LTV based on initial ARPA understates value. Net revenue retention above 100% changes the picture materially - and honestly, in your favour.

Assuming CAC stays flat. CAC almost always rises as you scale, because the cheapest, most reachable customers come first. Modelling constant CAC through a 10× growth plan is a standard forecasting error.

Counting a free trial as a customer. Only count customers who paid.

What to actually present to an investor

Four numbers, by segment, with your assumptions visible:

1. Fully loaded CAC, split by channel
2. Gross-margin-based LTV, over a stated window rather than to infinity
3. CAC payback period in months
4. Net revenue retention

And one sentence naming your churn assumption and why you believe it.

Founders who present these with the assumptions exposed are consistently taken more seriously than founders who present a 5:1 ratio and cannot say where it came from.

The one-line summary

Calculate CAC fully loaded, calculate LTV on gross profit over a fixed window, and pay more attention to payback period than to the LTV:CAC ratio - because payback is the one that tells you whether growth is funding itself or consuming your runway.