Unit Economics Calculator

Unit economics reduces a subscription business to the profit and cost of a single customer relationship. Lifetime value in its simplest recurring-revenue form is average revenue per user divided by the monthly churn rate, because 1 divided by churn is the expected customer lifespan in months: 5 percent monthly churn implies a 20 month average life, so 50 dollars of monthly ARPU yields 1,000 dollars of gross revenue. Multiplying by gross margin converts that to contribution, which is the figure that should be compared with customer acquisition cost. CAC is total sales and marketing spend over a period divided by the new customers won in that same period. Two ratios carry most of the diagnostic weight. An LTV to CAC ratio of 3 or higher is the conventional benchmark for a healthy software business; below 1 the company loses money on each customer, and above 5 it is often underinvesting in growth. CAC payback, computed as CAC divided by monthly gross profit per customer, is considered strong under 12 months and questionable beyond 24. The main caveat is that the 1 over churn formula assumes a constant hazard rate. Real cohorts churn heavily in the first few months and then flatten, so the simple formula understates value for sticky products and overstates it for leaky ones.

Customer lifetime value originated in direct-response marketing rather than software. Mail-order firms in the 1970s and 1980s already valued house lists by expected future orders per name, and the framework was formalized academically in the 1990s, notably in Frederick Reichheld's work on retention economics at Bain and Company and in relationship marketing research by Robert Blattberg and others. The core insight, that a fixed retention rate implies a geometric revenue stream whose present value can be computed in closed form, comes directly from that literature. The modern startup version was popularized by the software-as-a-service community in the late 2000s. David Skok, a partner at Matrix Partners, published the widely circulated SaaS Metrics and SaaS Metrics 2.0 essays beginning around 2010, which put the 3 to 1 LTV to CAC target and the 12 month payback rule into general circulation. Bessemer Venture Partners had earlier issued its laws of cloud computing, and later annual benchmark surveys from firms such as OpenView and KeyBanc Capital Markets supplied median figures by company size. These conventions spread quickly because the shift to subscription pricing made churn measurable month by month, something the older perpetual-license software model never permitted.