Unit economics for small business: calculating CAC and LTV
Unit economics answers a simple question: do we earn on one client. Without it you can grow and go bankrupt at the same time: the more clients, the bigger the loss. Let us look at the two key numbers: CAC and LTV.
CAC: cost of acquiring a client
- CAC = marketing and sales costs for a period ÷ number of new clients in the period
Include advertising, salaries and commissions of salespeople, tools (CRM, services) and your own time if it is significant. CAC is often higher than it seems.
LTV: client lifetime value
- LTV = average ticket × number of purchases over the lifetime × margin
If a client buys once, LTV equals the profit from one deal. Count profit (margin), not revenue.
How to read the result
A benchmark: LTV should be at least three times CAC. This is a common practical rule, not a law: for your industry the figure may differ. If the ratio is below 1, you lose money on every client.
Example
- Acquisition costs for the month: €1,200
- New clients: 10, so CAC = €120
- Average ticket €300, 2 purchases on average, margin 35%: LTV = 300 × 2 × 0.35 = €210
- LTV / CAC = 210 / 120 = 1.75
Conclusion: we earn on a client, but the margin of safety is small. It makes sense to scale advertising after raising the ticket, repeat purchases or lowering CAC.
What to do with the numbers
- Raise the average ticket and repeat sales.
- Lower CAC: strengthen channels that bring clients cheaper.
- Calculate separately by channel and product.
If you want to calculate your business’s unit economics and see where to grow, we can discuss it in a consultation.