Unit economics: customer acquisition cost and lifetime value

Unit economics measures whether a single customer is profitable. Customer acquisition cost (CAC) is what the business spends on sales and marketing to win one new customer; lifetime value (LTV) is the gross profit that customer is expected to generate before they leave. If lifetime value does not comfortably exceed acquisition cost, growing faster simply loses money faster.

Why look at profit per customer?

Subscription, software and online retail businesses often spend heavily up front to win customers who pay small amounts over many months. The statutory accounts show the marketing cost in full when it is incurred and the revenue only as it is earned, so a growing business can report losses even when each customer is highly profitable, and a shrinking one can look healthy while its customer base drains away. Unit economics separates the two effects.

ACCA’s performance management guidance on online businesses describes the three areas to measure: customer acquisition (attracting visitors and converting them into sales), customer retention (persuading first time customers to return) and customer extension (selling more to existing customers). It adds that, whatever the marketing statistics show, customers must ultimately lead to profit, and that management accountants have a role in calculating profit per customer and looking for evidence of return on marketing spend.

How do you calculate customer acquisition cost?

CAC is total sales and marketing spend for a period divided by the number of new customers won in that period. Decide what goes in and apply it consistently:

• paid advertising, affiliate fees and introductory discounts;
• sales staff pay and commission, and the marketing team’s costs;
• marketing software and agency fees;
• free trial costs, such as hosting or samples for users who do not convert.

Count only genuinely new customers, not returning ones, and allow for the lag between spend and sign up: a campaign paid for in March may produce customers in April. Calculating CAC separately for each channel shows which ones pay their way; a blended average can hide one expensive channel behind a cheap one.

How do you calculate lifetime value?

For a subscription business the simple formula is:

LTV = monthly revenue per customer × gross margin ÷ monthly churn rate

• Revenue per customer should exclude VAT. FRS 102 paragraph 23.41 defines the transaction price as excluding amounts collected on behalf of third parties, such as some sales taxes, and the same logic applies to management figures.
• Gross margin should deduct the costs of serving the customer: hosting, payment fees, delivery, support and the direct cost of goods. Using revenue rather than contribution overstates LTV.
• Churn is the share of customers at the start of a month who cancel during it. One divided by monthly churn gives the average customer life in months.

For an online retailer without subscriptions, replace churn with observed repeat purchase behaviour: average order value × gross margin × expected number of orders per customer, based on how earlier groups of customers actually behaved.

What does a worked example look like?

Illustration only. A software subscription costs £30 a month excluding VAT. Serving each customer costs £6 a month, so gross profit is £24 (80%). Monthly churn is 3%. Last quarter the business spent £60,000 on sales and marketing and won 150 new customers.

Each customer is profitable, but only just once the time value of money is included: £600 of discounted gross profit against £400 of acquisition cost, before any share of overheads. Reducing churn to 2% would lift undiscounted LTV to £1,200, which shows why retention often does more for unit economics than cheaper acquisition.

What do the ratios tell you?

• LTV to CAC shows how many times over a customer repays the cost of winning them. There is no official benchmark. Set a target high enough to cover overheads, the cost of finance and forecasting error.
• CAC payback is the payback period applied to a customer: the months of gross profit needed to recover acquisition cost. It drives how much cash growth consumes, because the cost is paid now and the gross profit arrives monthly.
• Discounted LTV applies the net present value approach. The longer customers stay, the bigger the gap between discounted and undiscounted LTV.

ACCA’s article on activity based management notes that customer profitability analysis can go further, allocating overheads such as support and account management to customers to find which ones generate a profit or loss. That is useful where a few demanding customers consume much of the support time; see activity based costing.

How are acquisition costs treated in the accounts?

Unit economics is a management measure; the statutory accounts follow FRS 102. Paragraph 18.8C requires advertising and promotional spend to be expensed and prohibits recognising internally generated customer lists, so most marketing spend reduces profit straight away. The revised Section 23, which applies to accounting periods beginning on or after 1 January 2026, allows an accounting policy of recognising costs to obtain a contract as an asset where they would not have been incurred without the contract (a sales commission is the standard example) and are expected to be recovered (paragraph 23.113). The policy must be applied consistently, but costs that would be amortised over one year or less may be expensed (paragraph 23.114). Revenue itself is recognised as the service is provided; see revenue from subscriptions and licences.

What mistakes come up most often?

• Calculating LTV on revenue instead of gross profit.
• Including VAT in revenue per customer.
• Excluding sales salaries or discounts from CAC so it looks cheaper.
• Assuming early churn will hold. Churn usually differs between new and long standing customers, so track each month’s intake separately.
• Ignoring discounting, which flatters long customer lives.
• Treating a good ratio as proof of profit. Overheads still have to be covered; set unit economics alongside the business’s other KPIs and test the churn and CAC assumptions with sensitivity analysis.

Solar Protect provides tax investigation insurance for businesses and fee protection schemes for accountancy practices. Read how our cover works or get a quote.

Sources

• ACCA: Data analytics
• ACCA: Data analytics 1
• ACCA: Activity based management
• Financial Reporting Council: FRS 102 September 2024 tmKYWO6

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.