Are you actually earning money? Unit economics 101

Hi :)

I constantly see tweets of people claiming millions of revenue after a genius paid marketing campaign.

This is great, don’t get me wrong. But I do wonder how sustainable some of these products are, especially in the B2C world.

Unfortunately, not many people know the difference between revenue and profits and how they tell you a better story about product market fit than you tell yourself.

Unit economics are a good way to get started. They help you understand your business and how your marketing spend actually bring profits.

What Are Unit Economics?

Unit economics refers to the direct revenues and costs associated with a single “unit” of your product or service. For a SaaS business, a unit might be one customer or one subscription period. The two most common metrics are:

• Customer Acquisition Cost (CAC): The average cost to acquire one customer.

  • These can be measured by channel (example: Google Ads, Meta Ads, etc.) to help you choose channels or overall to measure your business’ sustainability.

• Lifetime Value (LTV): The total revenue you expect to earn from that customer over the life of their relationship with your business.

  • If it’s a one-time purchase, this would be what a customer paid. If it’s a subscription business it would be the price of your subscription x the time an average customer stays with your product.

If your CAC > LTV, then you’re burning more money than you’re bringing in. If your CAC < LTV, then you’re making money.

It’s really that simple but many people don’t measure it. It’s common to think that just measuring your sales number is enough - if you have a high MRR you’re set.

This isn’t sustainable. If you’re in a VC-backed company you probably could live with your CAC being higher than your LTV, but if you’re bootstrapped you’re doomed.

The cool thing about unit economics is that it is dynamic. This means it can aid you in your decision making and help you correct course. They help you:

• Validate your Business Model: A clear CAC-to-LTV ratio confirms that your pricing and marketing strategies are effective.

• Manage Cash Flow: Knowing your per-customer profit helps you budget your ad spend and plan growth without external funding.

• Make Data-Driven Decisions: Tracking unit metrics enables you to tweak your product or marketing approach based on real data rather than assumptions.

Good companies have good unit economics from the start. Don’t take my word for it - here’s a pretty good opinion post by Sam Altman about how bad unit economics affect startups.

How to Setup and Use Unit Economics

1. Track Key Metrics

Start by setting up a simple dashboard to monitor:

• CAC: Sum your marketing expenses and divide by the number of new customers acquired.

• LTV: Estimate the average revenue per user and multiply by the average customer lifespan.

• Churn Rate: Keep an eye on how many customers leave over a set period.

2. Run Simple Experiments

Test different marketing channels with small budgets. Compare the CAC across channels to see which ones yield the highest LTV-to-CAC ratios. For instance, if Facebook ads yield a $20 CAC and content marketing brings in customers at $10, focus on the latter.

3. Optimize Based on Feedback

Use customer surveys and engagement data to refine your product offering. A low LTV might mean your product isn’t there yet.

Or maybe increase your prices to boost your LTV.

Or just focus on low CAC channels and see if you can scale with those. You get the idea, keep optimizing.

4. Make Informed Growth Decisions

When your unit economics are strong, reinvesting profits into growth becomes a sustainable strategy. If you know each customer brings in more than the cost to acquire them, you can confidently scale your marketing efforts.

High MRR might look impressive, but without solid unit economics, it’s just a number. Focus on building a profitable, sustainable business—one customer at a time.

Best,

Cleme from Ramen Road