Many startups experience increasing financial losses as their sales volume grows. The underlying cause is often poor unit economics. If you lose money on a single unit or customer, scaling sales tenfold simply scales your losses tenfold.
When unit economics are unprofitable, cash reserves deplete rapidly. Read our article: Burn rate and runway: Managing startup finances correctly
1. Key metrics of unit economics
- CAC (Customer Acquisition Cost): The total sales and marketing expenditure required to acquire a single new customer.
- LTV (Lifetime Value): The net gross profit a single customer generates over the entire duration of their relationship with the company.
- Golden rule (LTV/CAC>3x): The LTV metric should be at least three times higher than the CAC.
2. Formulas and practical application
CAC=TotalsalesandmarketingexpenditureNumberofnewcustomersacquired
LTV= Average Order Value x Purchase Frequency x Customer Lifespan x Gross Margin
For venture capital investors, the CAC Payback Period (the number of months required to recoup customer acquisition costs) is a critical metric. In top-performing SaaS startups, this period should be under 12 months.
Unit economics is the most objective measure of a startup’s underlying financial viability.
