Unit economics tells you whether your business model actually works at the level of a single customer. If you spend $500 to acquire a customer who generates $200 in lifetime revenue, no amount of growth will save you. Yet many founders delay this analysis until investors force the conversation.
The Core Equation: LTV vs. CAC
Lifetime Value (LTV) is the total revenue you expect from an average customer over the entire relationship. Customer Acquisition Cost (CAC) is the total cost to win that customer. A healthy business needs LTV to be at least 3x CAC. Below 3x, you are likely unprofitable on a per-customer basis even before accounting for operating expenses.
Calculating LTV Accurately
LTV = Average Revenue Per User (ARPU) x Gross Margin x Average Customer Lifetime. Do not inflate this number with optimistic assumptions. Use actual data: what is your current monthly churn rate? What is your real gross margin after hosting, support, and delivery costs? Be conservative -- investors will challenge inflated LTV figures.
The Payback Period
The payback period is the time it takes to recoup your CAC from a customer's revenue. For SaaS businesses, a payback period under 12 months is considered healthy. Over 18 months, and you are tying up too much capital in customer acquisition. Calculate it by dividing CAC by monthly gross profit per customer.
Improving Unit Economics
There are only three levers: reduce CAC (better targeting, higher conversion, referral programs), increase ARPU (pricing optimization, upselling, cross-selling), or reduce churn (better onboarding, customer success, product improvements). Focus on the lever with the most room for improvement.
When to Scale
Scale only when your unit economics are proven and repeatable across a meaningful sample size. Do not scale based on 10 customers. Wait until you have 50-100 customers and a clear, consistent pattern. Scaling prematurely with broken unit economics is the most expensive mistake a startup can make.
