Who it's for
An owner whose revenue is growing while the cash isn't, and who wants to understand the economics before hiring a CFO.
Key idea
If a single customer doesn't pay off, scale won't save you; it multiplies the loss. Unit economics answers whether you can grow at all.
Contents
- Seven numbers
- What to do with them
- Three places where the numbers usually lie
- Three levers if the economics don't add up
- What to do this week
Take the self-assessment
Unit economics answers one question: do you earn more on one customer than you spend to acquire and serve them? If the answer is no, any growth is an accelerated path to a cash gap.
The concept has grown complicated, but seven values are enough for a management decision. The difficulty lies in filling them in honestly, not in the formula.
Seven numbers
- 01
1. Average order value
Revenue from one deal. Use the median, not the mean: one large deal distorts the picture and creates a false sense of health.
- 02
2. Cost of delivery
Everything spent directly on fulfilling your obligations to the customer: materials, the work of the people doing it, fees, delivery. Don't forget the owner's time if it's involved.
- 03
3. Margin per sale
Order value minus cost of delivery. This is what the rest of the company lives on. A negative margin at this step ends the conversation about scaling.
- 04
4. Customer acquisition cost (CAC)
All marketing and sales costs for a period, divided by the number of new customers in the same period. Including the salespeople's salaries. Especially the salespeople's salaries.
- 05
5. Purchase frequency
How many times a year a customer buys. For a project business, the probability of a repeat project. This number is usually inflated based on the most loyal customers.
- 06
6. Customer lifetime
How long a customer stays with you on average. It's calculated by cohort. If you don't have 12+ months of data, work with a conservative estimate.
- 07
7. LTV
Margin × frequency × lifetime. This is how much one customer brings you over the whole relationship.
What to do with them
The core ratio is LTV to CAC. It isn't a goal in itself, but it frames the conversation.
LTV / CAC What it means What to do
Less than 1 Every new customer increases the loss Stop increasing traffic. Examine the order value, the cost of delivery or the funnel
From 1 to 3 The business works, but not for itself: the margin isn't enough to fund development Work on retention and cost of delivery before increasing acquisition
From 3 to 5 A healthy zone for most models You can scale, watching how CAC grows as volume increases
More than 5 You're most likely underinvesting in growth Check whether you're hitting a ceiling of demand or capacity
An important caveat
LTV/CAC is an indicator, not a universal law. For a business with a long deal cycle and a high order value, normal values differ from retail. Also look at the payback period on acquisition: how many months pass before CAC is recovered. If it's longer than your cash reserve, the ratio no longer matters; the cash gap does.
Three places where the numbers usually lie
Acquisition cost without salaries
The most common mistake: only the advertising budget goes into CAC. Salespeople, the marketer, contractors, the CRM are all part of the cost of acquisition. Include them honestly, and CAC often grows two or three times, changing the picture radically.
Customer lifetime based on the best customers
When you ask "how long does a customer stay with you," the ones who've been with you for five years come to mind. The median is usually much lower. Calculate by cohort: take all the customers who came in during one month a year ago and see how many are active now.
Cost of delivery without the owner's time
In a small business, the owner is often involved in delivery and doesn't count their own time. That creates an illusion of profitability that disappears the first time you try to hire someone to replace yourself. Assign yourself a market salary and recalculate.
Related service: Profitability Analysis
When you need to break the economics down by product, channel and segment.
Related service: Financial Model
If you need a working tool for scenarios.
Three levers if the economics don't add up
There are only three, and they work at different speeds. Companies usually rush to the third because it's the most visible, and get the slowest effect.
- 01 Margin. Price, the makeup of the offer, cost of delivery. Works quickly but runs up against the market and positioning.
- 02 Retention. Repeat purchases and lifetime. Works more slowly but raises LTV without a bigger budget. It's the most underestimated lever.
- 03 Acquisition cost. Channels, funnel conversion, lead quality. Works quickly when the mistakes are obvious and very slowly once the obvious has been done.
A practical rule
Before increasing your acquisition budget, check that you aren't losing the customers you've already acquired. A customer who left after their first purchase cost you the full CAC and returned only part of the margin.
What to do this week
Questions to ask yourself
Calculate the seven numbers for the past 12 months
- 01 The median order value, not the average. How different is it from the figure you usually quote?
- 02 CAC with sales and marketing salaries included. How many times larger did it get?
- 03 Customer lifetime based on a cohort from a year ago, not on memory.
- 04 How many months does it take for the acquisition of one customer to pay off?
- 05 Which of the three levers has gone untouched the longest?
Materials that continue the topic
- The cost of doing nothing
- Two sets of books: why an owner needs both
