Unit Economics

CAC is the total cost of convincing a potential customer to buy your product. This includes all marketing spend, sales team salaries, tools, and overhead directly tied to acquiring new customers. The formula: CAC = Total Sales & Marketing Spend ÷ New Customers Acquired. A company spending $50K/month on marketing and sales and acquiring 100 customers has a $500 CAC. CAC varies dramatically by channel — paid ads might be $300 CAC while organic content is $30. VCs obsess over CAC because it determines unit economics: if CAC exceeds LTV, every customer you acquire destroys value.

CAC = Total Sales & Marketing Spend ÷ New Customers Acquired

The LTV:CAC ratio compares how much a customer is worth over their lifetime to how much it costs to acquire them. It is the single most important ratio for determining whether your business model is fundamentally viable. The golden benchmark is 3:1 — each customer generates 3x what you spent to acquire them. Below 1:1, you're paying more to acquire customers than they'll ever generate. Between 1:1 and 3:1, you're viable but thin. Above 5:1, you may be under-investing in growth — competitors who spend more can outpace you.

LTV:CAC Ratio = LTV ÷ CAC (target: 3:1)

Lifetime Value is the total revenue you can expect from a single customer over the entire duration of your relationship. It is the most critical number for understanding how much you can afford to spend on acquiring customers. The simplest formula: LTV = ARPU ÷ Monthly Churn Rate. A customer paying $100/month with 5% monthly churn has an LTV of $2,000. Netflix's LTV exceeds $1,200 per subscriber because churn is below 2.5% — this justifies their $17B+ annual content spend. LTV is the roof of your building: it determines the maximum CAC you can afford, the features you can build, and the team you can hire.

LTV = ARPU ÷ Monthly Churn Rate

The CAC Payback Period is how many months it takes for a customer to generate enough gross profit to cover the cost of acquiring them. It measures how quickly your business recoups its marketing investment. Formula: CAC ÷ (ARPU × Gross Margin). If your CAC is $600, ARPU is $100/month, and gross margin is 80%, payback = $600 ÷ ($100 × 0.80) = 7.5 months. VCs care about this as much as LTV:CAC because it determines your cash efficiency — a business with 3-month payback can reinvest acquisition dollars 4x per year, while a 12-month payback business can only reinvest once.

Payback Period = CAC ÷ (ARPU × Gross Margin %)

Unit economics is the direct revenue and costs associated with a single 'unit' of your business model (usually one customer). If your unit economics are positive, every new customer generates profit. If negative, every new customer accelerates your death. The core calculation: Unit Profit = (LTV × Gross Margin) − CAC. If LTV is $2,000, gross margin is 80%, and CAC is $1,200, unit profit is ($2,000 × 0.80) − $1,200 = $400 per customer. This means each customer eventually contributes $400 toward covering fixed costs and generating profit.

Unit Profit = (LTV × Gross Margin) − CAC

Cohort analysis groups customers by their signup date (or another shared attribute) and tracks their behavior over time. Instead of looking at blended metrics that mask trends, you see how each 'class' of customers performs independently. A SaaS company with 5% monthly churn might discover that January cohort churns at 3% while March cohort churns at 9% — the blended 5% hides a deteriorating acquisition quality problem. Amplitude found that companies using cohort analysis identify retention problems 6-8 weeks earlier than those using aggregate metrics.

Cohort Retention Rate = (Active Users in Cohort at Month N ÷ Total Users in Cohort at Month 0) × 100

Expansion revenue is additional revenue generated from existing customers through upsells, cross-sells, add-ons, or usage growth — without acquiring a single new customer. It's the engine behind Net Revenue Retention above 100%. If your existing customer base generated $100K last month and generates $108K this month with no new sales, you have $8K in expansion revenue (8% expansion rate). Snowflake's 158% NRR is almost entirely driven by usage-based expansion — their customers spend more every quarter as their data volumes grow.

Expansion Rate = (Expansion MRR ÷ Beginning MRR) × 100

Contribution margin measures how much revenue from each unit sold contributes to covering fixed costs and generating profit after variable costs are subtracted. If you sell a subscription for $100/month and the variable costs (hosting, support, payment processing) are $20/month, your contribution margin is $80 (80%). This is the TRUE profit engine — every additional dollar of revenue at 80% CM adds $0.80 directly toward covering fixed costs. Once fixed costs are covered, contribution margin becomes pure profit. DoorDash operated at negative contribution margin for years (-$1.50 per order in 2019), meaning they lost money on every single delivery before even counting corporate overhead.

Contribution Margin = Revenue per Unit − Variable Costs per Unit | CM% = (CM ÷ Revenue) × 100