Understanding E-commerce Unit Economics: CAC, ROAS, and LTV Explained

Understanding E-commerce Unit Economics: CAC, ROAS, and LTV Explained

Sellintu Team

Understanding E-commerce Unit Economics: CAC, ROAS, and LTV Explained

In the fast-paced world of e-commerce, it’s easy to get caught up in top-line revenue growth. But as any seasoned entrepreneur knows, revenue is vanity, profit is sanity. The true health of your business isn’t measured just by how much you sell, but by the profitability of each transaction and customer relationship. This is where Unit Economics comes in.

Understanding your unit economics is the difference between a business that scales profitably and one that bleeds cash with every new sale. In this guide, we’ll break down the three most critical metrics: CAC, ROAS, and LTV, and show you how to use our Free Unit Economics Calculator to analyze your business.

Table of Contents

  1. What Are Unit Economics?
  2. The Big Three: CAC, ROAS, and LTV
  3. The Golden Ratio: LTV:CAC
  4. How to Calculate Your Metrics
  5. Optimize Your Profitability with Our Calculator

What Are Unit Economics?

Unit economics describes your business’s revenues and costs in relation to an individual unit. In e-commerce, this “unit” is typically one of two things:

  1. Buying a product (unit economics per order)
  2. Acquiring a customer (unit economics per customer)

By breaking down your business to this granular level, you can answer the fundamental question: Am I making money on every single sale/customer?

The Big Three: CAC, ROAS, and LTV

1. Customer Acquisition Cost (CAC)

CAC is the total cost of acquiring a new customer. It includes all marketing and sales expenses over a given period divided by the number of new customers acquired in that same period.

Formula: CAC = Total Marketing Spend / Number of New Customers Acquired

If you spend $1,000 on Facebook ads and get 50 new customers, your CAC is $20.

Why it matters: If your CAC is higher than the profit you make from a customer, your business model potential is flawed unless you can significantly increase LTV.

2. Return on Ad Spend (ROAS)

ROAS measures the revenue generated for every dollar spent on advertising. It’s a key metric for evaluating the immediate effectiveness of your marketing campaigns.

Formula: ROAS = Revenue from Ad Campaign / Cost of Ad Campaign

If you spend $1,000 on ads and generate $5,000 in revenue, your ROAS is 5x (or 500%).

Why it matters: ROAS tells you if your ads are working, but it doesn’t tell you if you’re profitable. A high ROAS can still mean net losses if your product margins are thin.

3. Customer Lifetime Value (LTV)

LTV (or CLV) is the total revenue you can expect from a single customer account throughout their relationship with your company.

Formula: LTV = Average Order Value × Purchase Frequency × Customer Lifespan

Why it matters: LTV allows you to determine how much you can afford to spend to acquire a customer. If a customer spends $50 today but comes back ten times over two years, they are worth substantially more than their initial purchase.

The Golden Ratio: LTV:CAC

The relationship between LTV and CAC is the ultimate indicator of your business’s long-term viability.

  • LTV:CAC < 1:1: You are losing money on every customer. Burn rate matches growth rate. (Danger Zone!)
  • LTV:CAC = 1:1: You are breaking even but not growing profitably.
  • LTV:CAC = 3:1: The Sweet Spot. You have a healthy business that can fund its own growth.
  • LTV:CAC > 5:1: You might be under-spending on growth. You could likely grow faster by increasing marketing spend.

How to Calculate Your Metrics

Doing these calculations manually can be tedious and prone to error, especially when factoring in variables like Gross Margin, VAT/GST, and operational costs.

To truly understand your profitability, you need to go beyond simple revenue and look at Contribution Margin—the profit left over after paying for the product, shipping, fees, and marketing.

Optimize Your Profitability with Our Calculator

We’ve built a specialized tool to help you visualize these metrics instantly.

👉 Try the Sellintu Unit Economics Calculator

With our calculator, you can:

  • Input your marketing spend and revenue.
  • Factor in COGS (Target Margin), Tax, and Shipping Costs.
  • Instantly see your ROAS, Break-even ROAS, and Actual Profit.
  • Determine if your ad spend is sustainable.

Example Scenario

Let’s say you sell a product for $100.

  • COGS: $40
  • Shipping & Fees: $15
  • Tax: $10

You have $35 left to spend on marketing and keep as profit. If your CAC is $30, you make $5 profit per order. If your CAC is $40, you lose $5 per order—even if your revenue looks great!

Our calculator automates this math, giving you a clear “Green Light” or “Red Light” on your unit economics.

Conclusion

Mastering your unit economics is not optional; it’s essential. By keeping a close eye on your CAC, ROAS, and especially the LTV:CAC ratio, you can make data-driven decisions that steer your e-commerce business toward sustainable, long-term growth.

Ready to crunch the numbers? Jump to the Calculator Now