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Metrics7 minDec 2024

Unit Economics 101: The Metrics That Actually Matter

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.