MCP tool: pm_unit_economics

Unit Economics

Compare customer value, acquisition cost, and the time needed to recover that cost.

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?" -- these figures help assess the decision alongside demand, retention, and available cash.

Limits

Before retention and revenue patterns stabilize, treat LTV as a scenario rather than a reliable forecast. You can still track acquisition spending and observed customer value.

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) divided by revenue. Use a decimal in the formula.

The math

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

The ratio compares estimated customer gross profit with acquisition cost. Payback estimates when gross profit recovers that cost, not when all company expenses are covered.

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

The estimate gives a 4:1 ratio and 9.4-month payback. Assess both against retention assumptions, other costs, and the cash available to fund acquisition.

Now hold CAC and ARPA fixed and reduce gross margin to 40%:

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

Payback doubles to 18.8 months. If customer lifetime and revenue are unchanged, gross-profit LTV also halves to $3,000 and the ratio falls to 2:1. Keeping a 4:1 ratio would require a separate change in lifetime value. Cash needs also depend on payment timing and acquisition pace.

In PM Toolkit

The combined MCP tool calculates LTV, CAC, their ratio, and payback from monthly revenue, churn, acquisition spending, new-customer count, and gross margin. Its health labels are guidance based on fixed rules, not proof of business sustainability.

Common mistakes

  • Ignoring payback. A high lifetime ratio can still require more acquisition funding than you have.
  • Treating a short period as stable. Compare several periods and customer groups before relying on a lifetime estimate.
  • Mixing business models. Use definitions and comparisons appropriate to how the business earns revenue.
  • Ignoring segments. A blended 4:1 ratio can hide groups at 8:1 and 1.5:1. Compare their inputs before reallocating spending.

Try it

Live calculatorRaw .md
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