Business & Finance · Explainer
Unit economics is the profit or loss you make on a single unit of your business, and for a subscription or membership that unit is one customer: what it costs to win them, what they pay each month, how long they stay and what else they buy along the way. Get those four numbers right and you know whether more marketing will grow your business or quietly drain it. Those numbers give you CAC (customer acquisition cost), LTV (lifetime value) and the ratio between them, the core SaaS (software as a service) metrics, and they work equally well for a gym, studio or subscription box.
The short version
- CAC (customer acquisition cost) is what a new paying customer costs you. LTV (customer lifetime value, sometimes written CLTV or CLV) is the margin they earn you before they leave. The ratio between the two tells you whether growth pays.
- For subscriptions and memberships, first-month ROAS (return on ad spend) badly understates the real return. In our two examples it is 0.20× and 0.94× in month one, but 10× and 14× in revenue over the customers’ lifetimes.
- Churn, the share of customers who leave each month, is the number that moves lifetime value most.
- Selling more to the customers you already have (upsell and cross-sell) and keeping them through the first few months are usually cheaper than buying new ones.
Free download: the unit economics glossary. Six printable pages with the framework, both worked examples and every term with its calculations. Free to print and share.
What is unit economics, and why does it matter?
Run a shop and each sale is a complete transaction: you know the margin the moment the till rings. A subscription or membership business is different. The money arrives a little at a time, often for years, while most of the cost of winning the customer is paid up front. That timing gap is why so many owners misjudge their marketing. A campaign that looks like a loss in its first month can be the best money the business ever spends, and one that looks fine can be losing money on every customer it brings in.
Unit economics closes the gap. Instead of looking at the business as a whole, you follow one customer, or one month’s intake of customers (a cohort), from the first advert they see to the day they leave, and add up what they cost and what they earned. The framework below shows the five stages of that journey and the measures that belong to each.
The five stages in plain English
1. Acquire: what does a new customer cost?
Advertising platforms sell you clicks (CPC, cost per click) or views (CPM, cost per thousand impressions), and report how often people click (CTR, click-through rate). Those numbers describe the advert. What matters to the business is CAC: everything you spent on sales and marketing in a period, divided by the new paying customers it produced. Don’t confuse it with CPA (cost per acquisition or action), which platforms often use to mean the cost of a trial or sign-up, before anyone has paid you anything.
2. Onboard: do they get value quickly?
New customers decide early whether you were worth it. TTV (time to value) is how long it takes them to get a first real win, and the activation rate is the share who get there. Both are strong early signs of who will still be paying in six months, and both are often cheaper to improve than your advertising.
3. Retain: do they stay?
Churn is the share of customers, or of revenue, lost each month. It decides how long the average customer stays: at a steady 5% a month, the average is 1 ÷ 0.05 = 20 months. GRR (gross revenue retention) measures how much of a group’s starting revenue you still have after cancellations and downgrades. A pause or “freeze” option, and offers to win back people who have left, both slow churn down.
4. Expand: do they spend more?
This is where you grow the value of customers you already have. Upsell means more of the same or a higher tier: extra users, a bigger plan, a move from one class a week to unlimited. Cross-sell means a different product to the same customer: an add-on module, a workshop, a retreat. Both lift ARPU (average revenue per user) and, with it, MRR and ARR (monthly and annual recurring revenue). NRR (net revenue retention) puts retention and expansion together: above 100%, your existing customers are worth more each year even if you never sign another one. Happy customers also bring their friends, a referral loop that lowers CAC.
5. Lifetime: was it worth it?
LTV (customer lifetime value, also written CLTV or CLV) is the margin a customer earns you over the whole relationship. The simple version is monthly revenue per customer × gross margin ÷ monthly churn. Divide it by CAC and you get the LTV:CAC ratio (lifetime value divided by acquisition cost): about 3:1 is a widely used rule of thumb for a healthy business. Payback is how many months of margin it takes to earn back the CAC. It matters for cash: a business can be profitable on paper and still run out of money while it waits.
A campaign that returned 0.20× in its first month is on course to return 10.1× over its customers’ lifetimes.
Case study 1: an accounting app for small plumbing firms
Picture a small software company selling an accounting app to sole-trader plumbers and small plumbing firms. The core product costs £25 a month (all prices here exclude VAT, value added tax). Two optional modules sit on top: Service Plans (+£15 a month), which manages annual boiler-service contracts and reminders, and Stock Management (+£10 a month). Firms with staff pay £8 a month for each extra engineer, and anyone can pay annually for ten months’ price instead of twelve. In our numbers everyone pays monthly; the annual plan only sets the ACV (annual contract value) figure in the table below.
The company markets in two places. It spends £2,500 a month on advertising in the plumbing trade press and £500 sponsoring plumbing forums and online trade groups. In the month we follow, that £3,000 produces 70 free trials. Of those, 42 plumbers send their first invoice within a week, and 24 go on to pay. A short onboarding call costs £15 for each new paying customer.
What it costs to win a customer
Each trial cost £42.86 (£3,000 ÷ 70), the figure an ad platform would call CPA. Each paying customer cost £140: £125 of marketing plus the £15 call. But the average hides the story. The trade press and the forums each brought in 12 customers, so the press cost £208 of marketing per customer and the forums £42, a fifth as much. The company only knows that because it asked every new customer how they heard about it and gave each channel its own promo code. Without that attribution the two channels would look identical.
Keeping and growing them
About 2.5% of customers cancel each month, as sole traders retire, change trade or go back to their accountant’s software. After a year about 18 of the 24 are still paying (74%), and the average customer stays 1 ÷ 0.025 = 40 months. Over the first year, 30% of the remaining customers add Service Plans, 20% add Stock Management and 15% add an engineer, taking average revenue per customer from £25 to £32.70. That expansion nearly fills the hole left by cancellations: the group keeps 74% of its starting revenue before upgrades (GRR) and 96.5% after them (NRR).
What one customer is worth
With an 80% gross margin (hosting, support and payment fees take the other 20%), the basic subscription alone would be worth £25 × 80% ÷ 2.5% = £800 per customer. With the add-ons it is worth £1,010, 26% more. Against a CAC of £140 that is an LTV:CAC of 7.2:1, and allowing for cancellations each customer pays back their acquisition cost in about 8 months.
Now look at ROAS. The 24 new customers pay £600 in their first month against £3,000 of marketing: 0.20×. Anyone judging the campaign on that would stop it. Over twelve months the same customers bring in 2.4× the spend, and over their lifetimes 10.1×. These are revenue figures and count only the £3,000 of advertising. LTV:CAC is lower because it uses margin, after running costs, and the full £140 CAC including onboarding calls.
The lesson: the cheapest customers came from the forums, and the add-on modules added 26% to lifetime value. Move budget towards what is working, offer Service Plans during onboarding, and judge campaigns on twelve-month value and LTV:CAC, never on first-month sales.
Case study 2: a mid-range yoga studio
The second business is a yoga studio with a plausible mid-range price ladder for a UK studio outside central London: £40 a month for one class a week, £55 for unlimited off-peak classes, £75 for eight classes a month and £95 for unlimited. Memberships roll monthly, need a week or two’s notice to cancel, and can be put on hold at any time. To keep the arithmetic readable we treat these prices as the studio’s revenue; a VAT-registered studio would keep five-sixths of a VAT-inclusive price.
New members arrive through a “30 days for £30” introductory offer. This month the studio spends £800 on Facebook Ads, buying about 1,600 clicks at 50p each, and £400 on a heavily discounted open day, covering teacher time and promotion. Facebook brings 25 people onto the intro offer and the open day 15. A quarter of those 40 starters, 10 people, go on to become members, and we assume both channels convert at the same rate. Across the four tiers, new members split 30% / 20% / 30% / 20%, so the average new member pays £64.50 a month.
An acquisition cost that pays for itself
Each starter cost £30 (£1,200 ÷ 40) and each new member £120 (£1,200 ÷ 10). But starters pay too: 40 of them at £30 bring in £1,200, exactly what the marketing cost. The studio’s net acquisition cost is about £0, because an intro month in a class with spare places costs almost nothing to deliver. That only holds while classes have spare places. Once classes fill, every intro-offer place is one a full-price member could have taken, and the offer starts to cost real money.
Two-speed churn
Studios like this have a constant flow of newcomers, a steep early drop-off and a core of members who stay for years. We model that as 15% of members leaving each month for the first three months, then 3% a month after that. The result: 47% of a month’s new members are still there after a year, 32% after two years and 11% after five. The typical (median) member leaves after about 10 months, but the average membership lasts 23, because the long-stayers pull the average up. Using the 3% loyal-core rate alone would wrongly suggest 33 months. The pause option matters here: a member on hold is one who can come back.
The tier staircase
The price ladder doubles as an upsell path. In the first year we assume 15% of one-class-a-week members move up to eight a month, 10% of eight-a-month members move to unlimited and 10% of off-peak members do the same, while 5% of unlimited members step down to eight a month. Net, that adds £2.78 a month per member after 12 months (upgrades +£2.98, downgrades −£0.20). Workshops, private sessions, retreats and retail add roughly £6 a month more, at a lower 40% margin.
What one member is worth
Over an average lifetime a new member brings in £1,676 of revenue and, at a 50% margin on membership after teacher pay and a share of room costs, £824 of margin. Upsell and cross-sell add 11% to it. Against the £120 gross acquisition cost, LTV:CAC is 6.9:1, and allowing for the early drop-off a member pays back their acquisition cost in about 5 months.
The Facebook Ads dashboard sees only the intro-offer sales: 25 × £30 = £750 against £800 of spend, a ROAS of 0.94×. On that view the ads lose money. Counting the members those starters became, the revenue return is 4.8× in a year and 14.0× over their lifetimes.
The lesson: the studio’s biggest lever is the first three months. Cutting new-starter churn from 15% to 10% a month adds about £142 of margin per member, more than all the upsell and cross-sell combined (£81). Book every starter into a second and third class before they leave the building, offer a pause before a cancellation, and then guide members up the staircase.
The two businesses side by side
| Measure | Plumbing app | Yoga studio |
|---|---|---|
| Marketing in the month | £3,000 | £1,200 |
| New paying customers | 24 | 10 |
| Trial or intro-offer conversion | 34% | 25% |
| CAC (gross) | £140 (incl. £15 onboarding) | £120 (≈ £0 net of intro income) |
| Monthly churn | 2.5% | 15% for 3 months, then 3% |
| Still paying after 12 months | 74% | 47% |
| Average revenue per customer at start | £25.00 | £64.50 |
| Expansion after 12 months | +£7.70 (add-on modules) | +£2.78 (tier upgrades) + £6 extras |
| LTV (margin) | £1,010 | £824 |
| Lift in LTV from upsell and cross-sell | +26% | +11% |
| LTV:CAC | 7.2:1 | 6.9:1 |
| Payback (allowing for cancellations) | 8 months | 5 months |
| Revenue ROAS: month 1 / 12 months / lifetime | 0.20× / 2.4× / 10.1× | 0.94× / 4.8× / 14.0× |
| Biggest lever | Cheaper channels and add-on modules | Keeping starters through months 1–3 |
What is a good LTV:CAC ratio?
Two rules of thumb are widely used: an LTV:CAC ratio of about 3:1, and payback within 12 months. Both case studies clear them comfortably. A ratio this far above 3:1 also suggests both businesses could afford to spend more on marketing, provided the extra customers cost about the same to win. But note that our lifetimes are uncapped: they count every month a customer might stay, however far off. Many investors and analysts cap lifetime at three to five years. Capped at five years, the plumbing app’s LTV falls to £781 (5.6:1) and the studio’s to £694 (5.8:1). On that stricter view the studio edges ahead. Its members either leave early or pay for years, so most of its value arrives inside five years. The app’s lower churn keeps more customers paying beyond year five (22% against 11%), and that later value is exactly what the cap cuts off: 23% of the app’s lifetime value, against 16% of the studio’s.
Every term explained, with the calculation from each case
Each term below shows what it stands for, what it tells you, and how it works out in each case study. Where a case study doesn’t use a measure, the table says so instead of inventing a figure.
| Term | Stands for | What it tells you | Plumbing app | Yoga studio |
|---|---|---|---|---|
| Acquire | ||||
| CPC | Cost per click | What each ad click costs | Not used: trade-press ads are bought per issue (£2,500 a month) | £800 ÷ 1,600 clicks = £0.50 |
| CPM | Cost per thousand impressions (views) | How most social ads are priced | Not used | If the £800 bought 160,000 views: £800 ÷ 160 = £5.00 |
| CTR | Click-through rate | How well an advert pulls | Not used | On those figures: 1,600 ÷ 160,000 = 1.0% |
| CPA | Cost per acquisition (or action) | Cost of a trial, sign-up or starter, before anyone has paid | £3,000 ÷ 70 trials = £42.86 | £1,200 ÷ 40 starters = £30 |
| CAC | Customer acquisition cost | All sales and marketing cost per new paying customer | (£3,000 + 24 × £15) ÷ 24 = £140 | £1,200 ÷ 10 = £120; net of £1,200 intro income ≈ £0 |
| Attribution | Which channel gets the credit | Shows which marketing actually works | Press £2,500 ÷ 12 = £208; forums £500 ÷ 12 = £42 | Facebook £800 ÷ 25 = £32 a starter; open day £400 ÷ 15 = £26.67 |
| ROAS | Return on ad spend | Revenue from ads ÷ ad spend | Month 1: £600 ÷ £3,000 = 0.20×; 12 months 2.4×; lifetime 10.1× | Month 1: £750 ÷ £800 = 0.94×; 12 months 4.8×; lifetime 14.0× |
| Onboard | ||||
| TTV | Time to value | How quickly a newcomer gets a first real win | First invoice sent within 7 days | Not modelled; we treat a third class booked as the first real win |
| Activation rate | Share who reach that first win | An early sign of who will stay | 42 ÷ 70 = 60% | Not modelled |
| Trial-to-paid | Share of trials or intro offers that convert | Turns sign-ups into revenue | 24 ÷ 70 = 34% | 10 ÷ 40 = 25% |
| Retain | ||||
| Churn | Customers (or revenue) lost per month | The biggest driver of lifetime value | 2.5% a month | 15% a month for 3 months, then 3% |
| Average lifetime | How long the average customer pays | Turns monthly value into lifetime value | 1 ÷ 2.5% = 40 months | 23 months on average; median 10 |
| GRR | Gross revenue retention | Revenue kept after cancellations and downgrades, ignoring upgrades | 17.7 × £25 ÷ £600 = 74% after 12 months | 4.67 × (£64.50 − £0.20) ÷ £645 = 47% after 12 months |
| DAU / MAU | Daily ÷ monthly active users | Engagement: who is drifting away | Not modelled; track logins | Not modelled; track class attendance |
| Expand | ||||
| Upsell | More of the same, or a higher tier | Raises revenue per customer | Extra engineer +£8 a month (15% take it) | £40 → £75 tier: +£35 a month (15% of one-a-week members) |
| Cross-sell | A different product to the same customer | Existing customers are the cheapest to sell to | Service Plans +£15 (30%); Stock +£10 (20%) | Workshops, privates, retreats, retail: about £6 a month |
| Attach rate | Share of customers who buy an add-on | Measures cross-sell success | 30% Service Plans; 20% Stock Management | Not modelled (average spend used instead) |
| ARPU | Average revenue per user (ARPA: per account) | What customers really pay after plan mix | £25.00 → £32.70 after 12 months | £64.50 → £67.28 after 12 months, plus £6 extras |
| MRR | Monthly recurring revenue | Predictable monthly subscription income | 24 × £25 = £600 | 10 × £64.50 = £645 |
| ARR | Annual recurring revenue | MRR × 12; the headline figure for boards and buyers | £600 × 12 = £7,200 | £645 × 12 = £7,740 |
| ACV | Annual contract value | What one annual contract is worth | Annual plan: 10 × £25 = £250 | Not used: memberships roll monthly |
| NRR | Net revenue retention | Revenue kept including upgrades; over 100% means growth with no new sales | 96.5% after 12 months | 48.7% after 12 months (membership only) |
| Referral | Customers bringing customers | New customers at almost no acquisition cost | Not modelled; forum word of mouth | Not modelled; bring-a-friend offers |
| Lifetime | ||||
| GM / COGS | Gross margin / cost of goods sold | Revenue minus the direct cost to serve. Subtract other variable costs too, such as sales commissions, and you have contribution margin, the strictest version | 80% (hosting, support, payment fees are the 20%) | 50% on membership (teacher pay, room costs); 40% on extras |
| LTV | Customer lifetime value (also CLTV, CLV) | Margin a customer earns over the whole relationship | £800 without add-ons (£25 × 80% ÷ 2.5%); £1,010 with them | £824 margin (£1,676 revenue) |
| LTV:CAC | Lifetime value ÷ acquisition cost | Value earned per £1 spent winning a customer; about 3:1 is a common rule of thumb | £1,010 ÷ £140 = 7.2:1 | £824 ÷ £120 = 6.9:1 |
| Payback | Months to earn back CAC | Drives cash flow | About 8 months (about £20 margin a month, less cancellations) | About 5 months, allowing for the early drop-off |
| VAT | Value added tax | If you are VAT-registered, work ex-VAT, or ROAS looks up to 20% better than it is, and LTV better still | Prices quoted ex-VAT | Prices treated as net revenue |
Take the table with you. Six printable pages with the framework, both worked examples and every term with its calculations. Free to print and share.
Five mistakes that make the numbers lie
- Using revenue instead of margin for lifetime value. A customer who pays £1,000 over their lifetime is not worth £1,000 to you if it costs £500 to serve them. Spend against margin.
- Including VAT. If you are VAT-registered, the VAT you charge is collected for HMRC (HM Revenue & Customs), not earned. Leave it in and every revenue figure is overstated by up to a fifth, and every margin figure by more.
- Using one blended churn rate. If most leavers go in the first few months, a single average hides both your biggest problem and your most valuable customers. Look at each month’s intake separately.
- Judging subscription marketing on first-month ROAS. It will almost always look poor. Look at twelve-month value and LTV:CAC instead.
- Leaving costs out of CAC. Onboarding calls, free trial costs, sales time and discounts are all part of winning a customer. And an intro offer is only cheap while you have spare capacity.
How to calculate CAC, LTV and payback for your own business
You don’t need special software to start. A spreadsheet and an hour with your existing systems will do:
- Pick one month’s intake of new customers from at least a year ago, so you can see what happened to them.
- Add up what you spent to win them: advertising (from the ad platforms), promotions, sales time and onboarding. Divide by the number who paid to get CAC.
- Count how many are still paying each month since. Your billing system, payment provider or booking system will have this. That gives you your churn curve.
- Add up what they have paid you, excluding VAT and refunds, and apply your gross margin from your accounts.
- Divide margin by CAC for LTV:CAC, and note the month in which cumulative margin passed CAC: that is your payback.
- Repeat for each marketing channel if you can tell where customers came from. If you can’t, start asking every new customer today.
Once the numbers exist, put them in one place everyone trusts. Our guide to data-driven marketing covers collecting the data, and 53 ways to increase your profit margin covers the margin side of the equation.
Frequently asked questions
What is unit economics in simple terms?
It is the profit or loss you make on one customer: what it cost to win them, compared with the margin they earn you before they leave. If that is positive, more customers means more profit; if it is negative, growth makes things worse.
What is a good LTV:CAC ratio?
About 3:1 is a widely used rule of thumb: every £1 spent winning a customer returns about £3 of margin over their lifetime. Below 1:1 you lose money on each customer. A much higher figure can mean you are under-investing in growth. Many investors also look for payback within 12 months.
How do you calculate customer lifetime value?
The simple version is average monthly revenue per customer × gross margin ÷ monthly churn. At £25 a month, an 80% margin and 2.5% churn, that is £25 × 0.8 ÷ 0.025 = £800. More accurate versions follow real groups of customers month by month, as our case studies do.
Why does first-month ROAS mislead subscription businesses?
Because the customer pays a little each month, while you pay for the advert up front. In our plumbing example, ROAS is 0.20× in month one but 10.1× over the customers’ lifetimes.
What is the difference between GRR and NRR?
GRR (gross revenue retention) shows how much of a group’s starting revenue you keep after cancellations and downgrades, ignoring upgrades, so it can never exceed 100%. NRR (net revenue retention) adds upgrades and add-ons back in, so it can exceed 100% when existing customers spend more over time.
Should these figures include VAT?
No. If you are VAT-registered, work with revenue excluding VAT. VAT belongs to HMRC. Including it overstates revenue and ROAS by up to a fifth, and margin-based figures such as lifetime value by more.
Both case studies use illustrative assumptions, not industry benchmarks, and every figure in the article and graphics is calculated from the same model. The yoga price ladder is illustrative of mid-range UK pricing, not a survey. This article is general information, not financial or tax advice.