Startup unit economics: CAC, contribution margin and LTV
Calculate startup CAC, contribution margin and lifetime value. Compare customer cohorts with clear definitions and an India-focused worksheet.
In this guide
What are unit economics?
Unit economics estimates the revenue and variable cost associated with one meaningful unit, such as a paid customer, order, subscription or location. The right unit depends on how the company sells and delivers value. Startup India asks founders to explain sales forecasts, target customers, conversion and retention; these measures should connect to observed business evidence rather than impressive but undefined ratios.
Choose a unit that matches how customers buy and use the product
A subscription business may use a paid customer or customer cohort; a marketplace may need to separate buyer and seller economics; a retailer may use an order or product. Define the time period, geography, channel and whether the measure includes free trials, refunds or inactive accounts.
Calculate contribution margin before allocating company overhead
For one unit, subtract variable delivery costs from net revenue after discounts, refunds and relevant transaction charges. If a product sells for ₹1,000 and direct unit costs total ₹600, the ₹400 contribution remains before fixed payroll, rent, taxes and other overhead. The example is arithmetic, not a recommended margin.
Calculate customer acquisition cost using matched periods and cohorts
A simple CAC divides the attributable sales and marketing cost for a period or cohort by the number of new paying customers acquired in that same scope. State which staff, channel and campaign costs are included. Do not divide a broad marketing budget by every registered account if many never pay.
| Unit and period | Net revenue | Variable costs | Contribution | Acquisition cost | Evidence or caveat |
|---|---|---|---|---|---|
| First paid order | |||||
| Repeat purchase or renewal | |||||
| Customer cohort after 3 months | |||||
| Customer cohort after 6 months |
How should you interpret LTV, payback and retention?
Treat lifetime value as an estimate, not a known customer fact
LTV depends on how long customers stay, how often they buy, revenue collected, gross margin, discounts, refunds and service costs. Early-stage companies may not have enough cohort history to estimate lifetime reliably. Show the observed period and assumptions instead of presenting an exact future value.
Use CAC payback only when the business model supports it
For recurring revenue, a rough payback estimate compares acquisition cost with recurring gross profit per customer over time. For a one-time purchase, compare acquisition cost with contribution from the first and any observed repeat orders. Exclude unearned future revenue and state whether refunds, discounts and collection delays are counted.
Compare cohorts and channels on a consistent basis
Review customers acquired in comparable periods and sources. A recent paid campaign may look different from referrals or older cohorts, and a blended average can hide an unprofitable channel. Track retention, repeat purchase and contribution by channel without claiming a causal result from a very small sample.
Which unit-economics mistakes should founders avoid?
Do not use revenue as if it were profit
A customer may generate revenue while requiring costly delivery, support, refunds, payment fees or discounts. Show contribution after the variable costs needed to serve that customer, then explain fixed overhead separately.
Do not apply a universal LTV-to-CAC target
A ratio depends on the definition, business model, time horizon, margin, cash collection and data quality. An attractive ratio based on lifetime assumptions can still hide long payback or poor retention. Explain your method and test what happens when customers leave sooner.
Do not mix free users, paid customers and retained customers
Define each denominator. Separate sign-ups, trial users, active users, paying customers, repeat buyers and contracted accounts. A larger user count is not proof of revenue quality unless the path to payment is measured.
Startup unit-economics questions
What is a good CAC for an Indian startup?
There is no universal CAC benchmark that applies across sectors, prices, customer types and acquisition channels. Compare CAC with your own contribution, retention, collection timing and growth strategy, and explain the cohort behind the number.
Can I calculate LTV before customers have stayed for a long time?
You can build an early estimate, but label it as a forecast and show the limited observed period. Use conservative assumptions, update it as cohorts mature and avoid presenting a projected lifetime as measured history.
Should marketplace startups combine buyer and seller economics?
Usually the two sides have different acquisition costs, retention and value. Define each side and then explain how activity on one side affects the other; a blended metric can conceal a weak part of the marketplace.
Do investors expect unit economics from a pre-revenue startup?
They may ask what has been tested and what remains unknown. Use pilots, interviews or small experiments honestly, and distinguish measured results from a model of future performance.
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Sources and publication record
Draft prepared 26 September 2026; project-team editorial review pending · Sources checked .
- Startup India: what investors assess in a startup planDepartment for Promotion of Industry and Internal Trade, Government of India