01Why unit economics come first
Most advertising decisions are made one level too low. Is this ROAS good? Is this cost per lead too high? Neither question has an answer until you know what a customer is worth and what you are willing to pay to win one. Those two numbers are your unit economics, and every bid target, budget and "is it working?" conversation hangs off them.
Google Ads amplifies the economics you already have. If a customer is worth more than they cost to win, more spend makes more money. If they are not, more spend makes the loss bigger, faster. No campaign setting changes which side of that line you are on.
02What each number means
- Profit per order: order value times gross margin, minus the per-order costs the margin leaves out (shipping, packing, payment fees, call-out costs).
- Customer lifetime value (cLTV): profit per order times the number of orders a customer places over their lifetime. We show it on profit, not revenue, because revenue LTV flatters: a £325 customer who leaves £127 of profit can only fund £127 of acquisition.
- CAC: ad spend divided by the new customers it won. Count new customers from ads only. Folding in repeat buyers or organic sales makes CAC look cheaper than it is.
- LTV:CAC: lifetime profit divided by the cost to win. Under 1 : 1 loses money on every customer. Around 3 : 1 is a widely used rule of thumb for a healthy balance between growth and profit.
- Payback: how long until a customer's profit covers what you paid to win them. This is a cash question. A business can be profitable on paper and still run out of money waiting.
03A worked example
The example in the calculator is hypothetical. An online shop sells at an average order of £65 with a 50% margin, and each order costs £7 to ship and process. That leaves £25.50 profit per order. Customers buy two and a half times a year and stay for two years, so five orders: £127.50 of lifetime profit.
£3,000 of ad spend won 100 new customers, so CAC is £30. LTV:CAC is 4.3 : 1, comfortably healthy. But the first order only makes £25.50, so each new customer starts £4.50 in the red and pays back on their second order, about five months later. That is fine if you can fund five months of growth. It is a problem if you cannot.
The same numbers set the ceiling. At a 3 : 1 target you could pay up to £42.50 per customer, which is the headroom to scale into. And because Google Ads only sees the first £65 order, the Target ROAS that matches that ceiling is around 153%, far lower than most shops would dare to set. That is exactly why it pays to know the lifetime numbers before touching the bids.
04Where it usually goes wrong
- Using revenue instead of profit. The most common error, and the most expensive. Every downstream target ends up too generous.
- Assuming a lifetime you have not seen. If your business is two years old, a five-year customer lifetime is a guess. Use what your own repeat data shows, and round down.
- Blending CAC. Total marketing spend divided by all new customers hides whether the ads themselves pay. Work it out for paid channels on their own.
- Ignoring cash flow. A long payback period means you are lending money to your customers. Know how many months you can fund before you scale.
If the numbers here look different from what your ad account says, that gap is usually tracking, not maths: conversions that are page views or button clicks rather than sales. It is the first thing a free audit checks.