If you can explain your unit economics clearly, you understand your business. If you can’t, growth can quietly make things worse. Here’s how the three most important numbers work together.
The three numbers
- CAC (Customer Acquisition Cost): What you spend on marketing to get one new customer.
- Contribution margin: What you keep from each order after all variable costs.
- LTV (Lifetime Value): The total contribution a customer brings over time.
A worked example
Numbers in this example are illustrative.
Step 1: Contribution margin per order
| Item | Amount |
|---|---|
| Average order value | ₹1,200 |
| Product cost (30%) | -₹360 |
| Shipping and packaging | -₹120 |
| Payment gateway fee (2%) | -₹24 |
| Returns and RTO allowance | -₹60 |
| Contribution per order (before marketing) | ₹636 (53%) |
Step 2: Compare with CAC
If this brand spends ₹700 to acquire a customer, the first order loses ₹64 (₹636 minus ₹700). That isn’t automatically bad, but only if customers come back.
Step 3: Calculate LTV
If the average customer orders 2.2 times in 12 months: ₹636 × 2.2 = ₹1,399 contribution over 12 months.
Step 4: The LTV to CAC ratio
₹1,399 ÷ ₹700 = 2.0x
A commonly cited rule of thumb is 3x or higher. At 2.0x, this brand is profitable per customer, but thin. It pays back its CAC on the second order.
Four levers to improve it
- Raise AOV with bundles, combos, or free-shipping thresholds.
- Cut variable costs by renegotiating shipping or packaging rates.
- Increase repeat rate with post-purchase emails, WhatsApp, and subscriptions.
- Lower CAC by improving conversion rates rather than just spending more.
Even small shifts add up. In this example, raising repeat orders from 2.2 to 2.8 lifts LTV to ₹1,781 and the ratio to about 2.5x, without spending a rupee more on ads.
FAQs
What is a good CAC for a D2C brand?
There’s no universal number. A good CAC is one your contribution margin and repeat rate can recover within a reasonable period, often within the first few orders.
Should LTV use revenue or contribution margin?
Contribution margin. Revenue-based LTV overstates what a customer is worth.
How often should I calculate unit economics?
Monthly, and separately for each sales channel.
Download The D2C Founder’s Cash Flow Checklist, which includes a margin health check.
Get the free checklist →Not sure your unit economics add up? The Financial Arc helps D2C founders break down their numbers by channel and find the levers that improve profitability.
Get in touch