Most founders think unit economics are something investors care about. They're right — but that's the wrong reason to understand them. Unit economics are the compass for every growth decision you make. Hiring, pricing, channel investment, market expansion — all of it should be anchored to what your numbers actually say about the viability of your model.
The problem is that most founders either don't know their numbers properly, or know them in a way that flatters the business. CAC calculated without founder time. LTV that ignores churn. Payback periods that don't include customer success costs. These aren't just presentation problems. They lead to real decisions that burn real money.
"If your unit economics don't work at small scale, more growth makes the problem bigger, not smaller."
CAC: Customer Acquisition Cost
CAC is the total cost of acquiring one new customer. The formula is straightforward: all sales and marketing costs in a period, divided by the number of new customers acquired in that period.
What most founders get wrong:they exclude their own time. If you're spending 20 hours a week on sales and your effective hourly rate is £200, that's £4,000 a month of CAC you're not counting. They also exclude tools, events, agency fees, and the cost of leads that didn't convert. CAC should include everything that goes into getting a signed contract.
Example: £30,000 in sales and marketing spend in a month (including salaries, tools, and your own time), with 10 new customers acquired = £3,000 CAC.
LTV: Customer Lifetime Value
LTV is the total revenue — or better, gross profit — you expect to receive from a customer over their lifetime with you. The basic formula: Average Revenue Per Customer ÷ Monthly Churn Rate.
What most founders get wrong:they use revenue, not gross profit. If you have 70% gross margins, your LTV for economic purposes is 70% of the revenue figure. They also underestimate churn. If you think you have 2% monthly churn, check your actual cohort data. Most early-stage companies are surprised.
Example: £500 MRR per customer, 2% monthly churn = LTV of £25,000 (at 100% margin). At 70% gross margin, economic LTV = £17,500.
The CAC:LTV Ratio
This is the ratio investors talk about most, and for good reason. It tells you how much you make relative to how much you spend to get there. The target for SaaS is typically 1:3 or better — for every £1 you spend acquiring a customer, you should make at least £3 in gross profit over their lifetime.
- Below 1:1— you are losing money on every customer. More growth makes this worse.
- 1:1 to 1:3— marginal. You might survive but you won't build a great business at this ratio.
- 1:3+— healthy. You have room to invest in growth.
- 1:5+— excellent. You likely have pricing power or very efficient acquisition.
Payback Period
Payback period is how long it takes to recover your CAC from gross profit. It's arguably more important than the LTV ratio for early-stage companies, because it tells you how much working capital you need to fuel growth.
Formula: CAC ÷ (Monthly Revenue per Customer × Gross Margin %)
Example: £3,000 CAC, £500 MRR, 70% gross margin = £3,000 ÷ £350 = 8.6 months payback.
For SaaS, a payback period under 12 months is generally considered healthy. Under 6 months is excellent. Over 18 months means you need significant capital to sustain growth, and investors will want to understand why.
Burn Multiple
Burn multiple is a newer metric that's become important during tighter funding markets: net burn ÷ net new ARR. It tells you how much you're spending to generate each pound of new revenue.
- Below 1×— you're generating more ARR than you're burning. Exceptional.
- 1–1.5×— good. Efficient growth.
- 1.5–2×— acceptable in early stages, watch carefully.
- Above 2×— you're burning significantly more than you're building. This is a red flag.
What These Numbers Should Change
Understanding your unit economics properly should change how you make decisions:
- If CAC is high, the answer isn't always "spend more on marketing." Sometimes it's "improve conversion" or "shorten the sales cycle."
- If LTV is low, the answer is often "reduce churn" rather than "acquire more customers."
- If payback is long, you need either more capital to fund growth or a way to shorten the cycle.
- If burn multiple is high, you need to either grow faster or spend less — and usually both.
These aren't vanity metrics. They're the instruments that tell you whether the machine you're building is worth accelerating. Get them right before you hire your first sales team. The whole growth strategy follows from them.