Unit Economics

Unit economics

Answer one question honestly: does one customer pay back more than it cost to win and serve them, and how fast? You compute four load-bearing numbers — CAC, contribution margin, LTV, CAC payback period — plus the two ratios operators and investors actually argue about (LTV:CAC, NRR). Then you diagnose why a number is where it is and name the single lever that moves it.

This is a measurement-and-diagnosis skill, not a projection skill. You do not build the multi-year model here (that is the financial-model sibling); you build the per-customer truth that the model's growth assumptions have to rest on.

What this skill produces

A unit-economics worksheet (unit-economics.{yaml,csv,md}) where:

• a block of named inputs — period S&M spend, new customers, monthly ARPA, gross margin %, monthly churn, optional segment rows — is stated explicitly;
• every derived figure (CAC, contribution margin, LTV, payback, LTV:CAC) is recomputed from those inputs so the relationships are self-consistent;
• the worst number is diagnosed and one concrete lever is prescribed.

scripts/verify.sh re-derives the figures and fails if the arithmetic lies (see the last section). If you only hand back prose, you have not finished — emit the worksheet.

The four numbers and the input people get wrong

Each formula has one input that, done sloppily, silently invalidates everything downstream. Tag the input, not just the result.

Worked Bad → Good — the revenue-LTV inflation. Same inputs: ARPA $400/mo, gross margin 75%, monthly churn 3%.

Bad  (revenue LTV):       400 / 0.03          = $13,333   <- overstates by 33%
Good (gross-margin LTV): (400 * 0.75) / 0.03  = $10,000   <- what a customer is actually worth

LTV must use gross-margin dollars because not all revenue is profit — hosting, support, and payment fees come out first. The revenue version flatters the LTV:CAC ratio and is the single most common dishonesty in a deck. (Beancount.io "2026 SaaS Metrics Stack" 2026-05-10; ChartMogul LTV guide; both accessed 2026-06-02.)

Full derivations, cohort-LTV vs formula-LTV, the Skok discounted model, and segment roll-up math live in references/formulas.md. Read it before you defend a number to an investor.

Order of operations (the spine)

Run these in order — each step is an input to the next, so skipping one makes everything after it fiction.

1. Gross margin first. Every downstream metric multiplies by it. If gross margin is unknown, the COGS per unit must be tracked first (route to cost-tracking) — you cannot compute LTV or payback on a guessed margin.
2. CAC, fully loaded. Include all sales + marketing cost; exclude customer-success/retention spend and returning customers.
3. Contribution margin per customer. ARPA minus variable cost to serve — the dollars that actually pay back CAC.
4. LTV, capped. Gross-margin LTV with a lifetime cap (see conservatism), not 1/churn run to infinity.
5. Payback period. CAC ÷ monthly contribution margin.
6. Ratios. LTV:CAC and NRR/GRR for context.
7. Diagnose & prescribe. Find the worst number, name its cause, name the lever.

Get the inputs honest

CAC is fully loaded or it is a lie. Decide what goes in the numerator before you divide.

Three rules that catch most errors:

• Gross margin, not opex margin. Gross margin reflects COGS (hosting, support, payment fees), not salaries/rent. Mixing in opex understates margin and quietly tanks LTV. (Beancount.io 2026-05-10, accessed 2026-06-02.)
• Match time units. Monthly ARPA pairs with monthly churn; annual with annual. Mixing them silently 12×'s or ÷12's the LTV — the most common arithmetic error in the whole exercise. (ChartMogul; metrickit LTV guide; accessed 2026-06-02.)
• Right period, right denominator. Spend in period P ÷ customers acquired in period P. Don't divide this quarter's spend by all-time customers.

Segment before you optimize

A single blended number hides the only insight that matters. Reporting one blended CAC of $1,200 when self-serve is $80 and field sales is $40,000 tells you nothing actionable — the channels have wildly different CAC, ARPA, and churn. (lucid.now LTV/CAC errors; andrewchen; accessed 2026-06-02.)

Blended CAC $1,200  =  self-serve $80  +  inside sales $900  +  field $40,000
                       (lever: scale)   (lever: AE ramp)      (lever: ACV / cycle)

Two more separations to keep clean:

• Paid CAC vs blended CAC. Blended includes free/organic; paid isolates the channels you can actually scale with money. Optimize paid; report both.
• Self-serve / inside sales / field sales. Split on go-to-motion, because the lever for each is different. If one segment is bleeding while blended "looks fine," that's exactly the non-obvious failure this skill exists to surface.

Benchmarks (2025-2026)

A ratio is a conversation-starter, not a pass/fail grade. Read the whole row before you celebrate or panic.

(Beancount.io 2026-05-10; First Page Sage CAC Payback Benchmarks 2025; Optifai B2B LTV benchmark, 939 companies; cast.app NRR; all accessed 2026-06-02.)

The honest framing: a 2.5:1 with 9-month payback and 120% NRR beats a 4:1 with 36-month payback and 95% NRR. Payback and NRR decide whether you can survive the gap between spend and return; the ratio alone can't. Rule of 40 (ARR growth % + profit margin % ≥ 40%) is the company-level destination these feed — cite it, but compute it in financial-model, not here.