Unit economics: ROAS, margin, and LTV

A spend is worth it when the lifetime margin it buys beats the cost of buying it.

The idea

ROAS tells you revenue per ad dollar, but revenue is not profit — margin is the bridge. Below a break-even ROAS of 1 / margin, you lose money the moment you spend. Above it, you earn — and if customers stick around, their lifetime value can justify a spend that even loses money on the first order.

Drag the dials below and watch the chain react: ROAS, gross profit, LTV, and the LTV:CAC ratio that most teams treat as the fund-it / fix-it line at 3:1.

How it works

Every number in the chain is one short formula. Here it is worked through on the default scenario — a subscription that loses money on the first order but earns it back over a long life:

spend      = $12,000        margin = 80%
month-1 rev = $6,000        ARPU   = $30 / mo      churn = 8% / mo

ROAS            = revenue / spend        = 6,000 / 12,000   = 0.50
break-even ROAS = 1 / margin             = 1 / 0.80         = 1.25
                  -> ROAS 0.50 < 1.25: underwater on the FIRST order

customers       = revenue / ARPU         = 6,000 / 30       = 200
CAC             = spend / customers      = 12,000 / 200     = $60

avg lifetime    = 1 / churn              = 1 / 0.08         = 12.5 months
LTV             = ARPU x margin / churn  = 30 x 0.80 / 0.08 = $300

LTV : CAC       = LTV / CAC              = 300 / 60         = 5.0
                  -> 5.0 >= 3: the lifetime margin pays the CAC back 5x. Fund it.

The retention curve is where LTV comes from: keep (1 - churn) of the cohort each month and the retained fractions sum to about 1 / churn months of paying life. Multiply those customer-months by margin-adjusted ARPU and you have LTV — the shaded area in the chart.

When to use it

Reach for	The trade-off
Break-even ROAS — a fast floor for a single campaign or channel.	It only covers ad cost and margin. Returns, shipping, support, and overhead sit on top.
LTV:CAC — deciding whether a whole acquisition motion is worth scaling.	Only as trustworthy as the churn curve and horizon behind the LTV. Garbage in, confident garbage out.
Payback period (CAC ÷ monthly margin per customer) — when cash timing matters more than the ratio.	A great LTV:CAC with a 30-month payback can still starve you of cash.

Watch out for

• Infinite-horizon LTV. 1 / churn assumes customers pay forever. Cap it to a horizon you would actually bet on — 12 to 24 months — or you will fund CAC against revenue that never arrives.
• No discounting. A dollar in month 20 is worth less than one today. For long lifetimes, discount future margin or the LTV is inflated.
• Whale skew. Mean ARPU can be dragged up by a few large accounts. If the median customer is far below the mean, a blended LTV oversells the typical unit.
• Blended vs paid CAC. Dividing spend by all new customers — including organic and word-of-mouth — flatters paid CAC. Judge a paid channel on the customers it actually bought.
• Revenue mistaken for profit. Feed LTV with gross (contribution) margin, not top-line revenue. A 2.0 ROAS at 20% margin still loses money.

Worked example

An interviewer says: "Our new channel runs at a 2.0 ROAS but finance says stop it. Who is right?" The move is to ask for margin. At 40% gross margin, break-even ROAS is 1 / 0.40 = 2.5 — so a 2.0 ROAS is below break-even and loses money on every order. Finance is right unless the LTV rescues it: if those buyers repeat and LTV:CAC clears 3:1 over a horizon you trust, the channel can be a deliberate loss-leader. Naming break-even ROAS and then reaching for LTV:CAC — rather than arguing about the raw 2.0 — is the answer they are listening for.