FerroxLabs Unit economics
When to load this mode
The user is asking whether the product makes money — not whether the month did. Load when you hear "is this customer profitable," "what's our CAC," "what's the LTV," "how long until a customer pays back," or "should we spend more on acquisition."
Procedure
Unit economics is the answer to: does each new customer add cash, and how fast? Six steps.
1. Refuse to model under ten paying customers. Below that, every number is noise. Tell the user so, then offer to design the smallest test that produces real numbers — a paid pilot at full price beats any spreadsheet.
2. Compute contribution margin per customer per month. Revenue per customer per month, minus direct cost to serve that customer (hosting, support time, payment processing, third-party tools billed per seat, fulfillment). Not overhead. Not marketing. Just the cost that exists because that customer exists. If contribution margin is negative, stop — no acquisition spend will fix it.
3. Compute CAC (customer acquisition cost). Total sales and marketing spend for a period, divided by paid customers acquired in that period. Include all of it — ad spend, content production, sales labor proportional to time-on-acquisition, software used to run acquisition. A CAC number that ignores labor is fiction.
4. Compute payback period. CAC divided by contribution margin per month. The answer is the number of months a customer must stay paid for the acquisition to break even. Healthy bootstrapped businesses sit under twelve months. Funded businesses can stretch to twenty-four if churn is genuinely low.
5. Compute LTV honestly. Average customer lifespan equals one divided by monthly churn rate. LTV equals contribution margin per month times lifespan. Cap the lifespan at thirty-six months even when math says longer — projections beyond three years on a young product are wishful thinking.
6. Compute LTV:CAC ratio. Healthy floor is 3:1. Below that, the user is buying customers at a loss across their lifetime. Above 5:1, the user is probably under-investing in growth.
Report contribution margin, payback period, and LTV:CAC. Name which of the three is the weakest, and which lever moves it most — price, cost-to-serve, or churn.
Decision rules
- Fix contribution margin before scaling acquisition. Spending more to acquire customers who lose money at the unit level burns cash faster, not slower.
- Payback under six months: scale acquisition. The capital recycles fast enough that growth is self-funding within two quarters.
- Payback six to twelve months: hold steady, work on retention. Each month of churn reduction shortens payback more than ad-spend tuning.
- Payback over twelve months on a bootstrapped business: do not scale. You will run out of cash before payback closes the loop.
- Churn is the biggest lever. A one-point churn reduction beats a one-point CAC reduction in nearly every model. Route to the research specialist for the why behind churn.
Anti-patterns
- Confusing gross margin with contribution margin. Gross margin includes some fixed costs of delivery; contribution margin only includes variable cost per customer. Mixing them inflates payback math.
- Ignoring sales labor in CAC. Founder time spent closing deals is the largest hidden cost in early CAC. Cost it at market rate.
- Projecting LTV on three months of retention data. Cohort one is a vanity number. Use the oldest cohort with at least nine months of history, or cap projections hard.
- Averaging CAC across channels. Blended CAC hides which channel works. Compute per-channel; kill the worst-performing.
- Treating annual prepays as instant LTV. Cash collected up front is cash, but LTV math should still be monthly so retention shows up.
Before / after
Before: "We're paying $400 to acquire a $99/mo customer, LTV is huge because SaaS."
After: "Contribution margin per customer: $74/mo ($99 revenue minus $18 hosting/support minus $7 payment processing). CAC blended $400; channel-A CAC $220, channel-B CAC $890 — kill channel B. Payback at blended CAC: 5.4 months. Monthly churn 4.2%, lifespan capped at 24 months for projection. LTV $1,776. LTV:CAC 4.4:1 — healthy but churn is the constraint; one point of churn reduction adds $310 to LTV. Recommendation: hold acquisition spend flat, route retention investigation to the research specialist."