Why Unit Economics Matter
You're growing. You're adding customers. But are you making money?
Most founders don't know. They track vanity metrics like signups and DAU. They ignore the metrics that actually matter.
The Core Metrics
CAC: Customer Acquisition Cost
How much does it cost to acquire one customer?
Formula: Total marketing spend / New customers acquired
Example: $10,000 spent / 100 new customers = $100 CAC
LTV: Lifetime Value
How much revenue does one customer generate over their lifetime?
Formula: Average revenue per customer x Average customer lifetime
Example: $100/month x 12 months = $1,200 LTV
LTV:CAC Ratio
The most important metric. How many times does LTV exceed CAC?
Formula: LTV / CAC
Example: $1,200 / $100 = 12:1 ratio
Good ratio: 3:1 or higher. Excellent: 5:1 or higher.
Payback Period
How long until you recoup the CAC?
Formula: CAC / Monthly revenue per customer
Example: $100 / $100/month = 1 month payback
Good payback: 3-6 months. Excellent: 1-3 months.
Why These Metrics Matter
If your LTV:CAC ratio is 3:1, you can scale profitably. For every dollar you spend, you make three.
If your LTV:CAC ratio is 1:1, you're losing money. Don't scale.
How to Improve Unit Economics
Increase LTV
- Reduce churn (keep customers longer)
- Increase average revenue per customer
- Upsell and cross-sell
Decrease CAC
- Improve conversion rates
- Use cheaper channels
- Improve product-market fit (word of mouth)
Common Mistakes
Mistake 1: Ignoring churn. High churn kills LTV.
Mistake 2: Scaling before unit economics work. You'll just lose money faster.
Mistake 3: Not tracking these metrics. You can't improve what you don't measure.
The Bottom Line
Know your CAC, LTV, and LTV:CAC ratio. If ratio > 3:1, you can scale. If not, fix your unit economics first.