MCP tool: pm_unit_economics

Unit Economics

Four numbers that decide whether your business model works: LTV, CAC, LTV:CAC ratio, and CAC payback period.

When to use this

Quarterly business reviews. Investor updates. Any decision about increasing or shifting growth spend. Use it whenever someone says "should we double the marketing budget?" -- the answer is in these four numbers.

When NOT to use this

Pre-product-market-fit. The numbers move too fast to be predictive. You'll calculate a ratio in January, watch it halve by March, and conclude the framework is broken. The framework is fine. Your business isn't steady-state yet. Wait for retention curves to flatten before scoring yourself against this.

Inputs

  • LTV (margin-adjusted, not revenue). See LTV doc.
  • CAC (fully loaded, including salaries). See CAC doc.
  • ARPA: Average Revenue Per Account, monthly.
  • Gross margin: Revenue minus cost of serving the customer.

The math

LTV:CAC ratio   = LTV / CAC
Payback months  = CAC / (ARPA x gross_margin)

Ratio tells you whether the business model is solvent at the unit level. Payback tells you how long your cash is tied up before each customer turns profitable. Both matter. Looking at one without the other is how cash-poor companies die healthy on paper.

A worked example

A SaaS business: $6,000 LTV (margin-adjusted), $1,500 CAC, $200 ARPA, 80% gross margin.

LTV:CAC ratio  = $6,000 / $1,500            = 4.0
Payback months = $1,500 / ($200 x 0.80)     = 9.4 months

4:1 ratio is healthy. 9.4-month payback is acceptable. This business is sustainable.

Now imagine the same 4:1 ratio with $200 ARPA at 40% margin (cloud costs are killing you):

Payback months = $1,500 / ($200 x 0.40)     = 18.8 months

Same ratio. Twice the payback. You need twice the cash on hand to run the same growth plan. A funded startup can absorb 18 months. A bootstrapped one cannot. The ratio looks identical. The risk is not.

How pmtoolkit does it differently

We surface ratio and payback together, and we flag the trap: a 3:1 ratio with a 24-month payback. That combination is what kills cash-poor companies. The ratio looks fine. The payback eats your runway. Both numbers have to clear the bar, not just one.

We also annotate the worked example with your industry's typical payback range, so you can see whether 9 months is fast (B2B SMB norm is closer to 18) or slow (consumer subscription norm is closer to 6).

Common mistakes

  • Optimizing ratio while ignoring payback. A 5:1 ratio with 30-month payback is a slow-motion cash crisis dressed up as a healthy business.
  • Treating one quarter as steady state. A single good quarter can be acquisition luck, seasonal pull-forward, or one large customer's expansion. Use trailing four quarters.
  • Applying SaaS benchmarks to marketplaces or one-time-purchase. Different revenue models, different math. 3:1 isn't the bar for a take-rate marketplace.
  • Ignoring the segment view. Blended ratio of 4:1 can hide one segment at 8:1 and another at 1.5:1. The blended number tells you nothing about where to invest more.

Try it

Live calculatorRaw .md
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