Unit Economics & LTV:CAC

Unit Economics & LTV:CAC

Establish whether a business can profitably acquire customers — the foundation under every budget and growth decision. Get LTV, LTV:CAC, and CAC payback, then judge them against named reference points. This is usually the first thing to run before any paid-media or budget work.

When to use

The user needs to compute or validate unit economics, set a CAC ceiling, or answer "can we afford to spend more?"

Before you start

1. Read the brand/product context first (.agents/product-marketing.md / .agents/aaj-brand.md) for model and pricing, if present.
2. Gather inputs for the model:
   • Subscription: monthly revenue per account (ARPA), gross margin %, monthly churn % (or average lifetime in months), and CAC. Pass churn as a percentage: 3 for 3%, 0.9 for 0.9%. Values below 0.1 are rejected as likely proportions; for churn that low, pass lifetime in months.
   • Ecommerce: average order value, gross margin %, orders per year, retention in years, and CAC.
   • Services / contract: average contract value, gross margin %, retention in years, and CAC.
   • If CAC isn't known, supply ad spend and customers acquired to derive blended CAC.

The math

Subscription:  LTV = (ARPA_monthly × grossMargin%) ÷ monthlyChurn%
               CAC payback (months) = CAC ÷ (ARPA_monthly × grossMargin%)
Ecommerce:     LTV = AOV × grossMargin% × ordersPerYear × retentionYears
Services:      LTV = ACV × grossMargin% × retentionYears
Everywhere:    LTV:CAC = LTV ÷ CAC

Always use gross-margin LTV (revenue × margin), not revenue LTV — revenue you don't keep can't pay back acquisition.

Run the engine

Paths assume you installed with npx skills add. From a clone of this repo, use skills/unit-economics/resources/… instead.

node .agents/skills/unit-economics/resources/unit-economics.js  # demo (subscription)
node .agents/skills/unit-economics/resources/unit-economics.js '{"model":"ecommerce","aov":80,"grossMargin":60,"ordersPerYear":3,"retentionYears":2,"cac":40}'
node .agents/skills/unit-economics/resources/unit-economics.js --help

It prints LTV, LTV:CAC, payback, and a verdict, plus a JSON block.

Interpret the result

• LTV:CAC above 3:1 is David Skok's reference point for SaaS (SaaS Metrics 2.0); he notes the best SaaS businesses sometimes reach 7 or 8. Below 3:1, fix economics before scaling spend. For ecommerce and services the engine shows 3:1 as a SaaS reference point, not a benchmark for those models. A very high ratio can mean under-investment if demand exists — that's AAJ's read, not a benchmark.
• CAC payback: Skok puts the line at 12 months for SaaS. Bessemer's guideline (Scaling to $100 Million, 2021) varies by segment: under 12 months for SMB, 18 for mid-market, 24 for enterprise — pass "segment" to use it. There is no sourced payback guideline in this skill for ecommerce or services; pass "paybackTargetMonths" from your own cash runway to get a verdict.
• The biggest LTV levers are usually retention/churn and margin, not ARPA. A small churn improvement compounds through LTV.

Present the result

Lead with the three numbers (LTV, LTV:CAC, payback), then the verdict, then the one or two highest-leverage fixes. State that LTV is gross-margin based.

Guardrails & common mistakes

• Use gross-margin LTV, never revenue LTV.
• Be honest about churn. Early-stage churn estimates are often optimistic; if unsure, model a range.
• Blended vs paid CAC. Blended CAC (all new customers ÷ all S&M) flatters paid efficiency; for channel decisions use paid CAC. Say which you used.
• Don't over-trust a single ratio. A healthy LTV:CAC with 24-month payback can still strain a cash-tight business.

Related AAJ resources

• Interactive tool: https://aajconsult.com/tools/unit-economics-calculator

Related skills

paid-media-budget-allocation (uses the CAC ceiling this produces) · marketing-budget-planning · lifecycle-and-retention (the biggest LTV lever).