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Business & Tax
Master startup unit economics: customer acquisition cost, lifetime value, and payback period.
By FreeCalculators Editorial · Published 2026-09-01 · Updated 2026-09-04 · 4 min read · 921 words
Unit economics is the profit and loss of a single customer: what it costs to acquire one (CAC), how much gross profit that customer produces over the relationship (LTV), and how many months pass before the acquisition cost is repaid (payback). A business with an LTV to CAC ratio above three and a payback under twelve months can fund its own growth. One with a strong ratio and a thirty-month payback can be profitable on paper and still run out of cash.
Compute all three on gross profit, never on revenue. Revenue-based LTV overstates the value of a customer by whatever your cost of delivery is, which for a product business is usually most of the number.
| Metric | Healthy | Watch | Broken |
|---|---|---|---|
| LTV to CAC ratio | Above 3.0 | 1.5 to 3.0 | Below 1.0 |
| CAC payback period | Under 12 months | 12 to 24 months | Over 24 months |
| Monthly churn, subscription | Under 2% | 2 to 5% | Above 5% |
| Gross margin, software | Above 70% | 50 to 70% | Below 50% |
| Gross margin, physical product | Above 40% | 25 to 40% | Below 25% |
The ratio tells you whether a customer is worth acquiring. The payback period tells you whether you can afford to acquire many. If payback is eighteen months, every customer you add consumes cash for a year and a half, so growth increases the cash deficit even though each customer is profitable. The Federal Reserve Small Business Credit Survey has consistently found that small firms fund themselves mostly from retained earnings and personal funds, which means a long payback has to be financed from the owner pocket or not at all.
Same ratio, two very different businesses (2026)
Business A: annual software plan Annual price ....................... $ 1,200 Gross margin ....................... 80% Annual gross profit ................ $ 960 CAC ................................ $ 900 Retention .......................... 3.5 years LTV = $960 x 3.5 ................... $ 3,360 LTV/CAC ............................ 3.7x Payback: paid annually up front .... 0.9 years Business B: monthly subscription Monthly price ...................... $ 100 Gross margin ....................... 80% Monthly gross profit ............... $ 80 CAC ................................ $ 1,400 Monthly churn 2% -> life 50 months LTV = $80 x 50 ..................... $ 4,000 LTV/CAC ............................ 2.9x Payback = $1,400 / $80 ............. 17.5 months Both look viable; only A can self-fund growth.
Comprehensive Guide
Read our business and tax guide for margins, payroll, and tax planning.
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This guide was written and reviewed by FreeCalculators Editorial, drawing on published formulas, official government sources, and real calculator outputs from our 4 calculators in this category. Every claim is sourced; every formula is auditable. Read our review policy.