Financial Unit Economics
Table of Contents
Example
Scenario: SaaS startup, $100/month subscription
- CAC: $20k spend / 100 customers = $200
- Gross margin: ($100 - $20 variable) / $100 = 80%
- Monthly churn: 5% -> Average lifetime = 20 months
- LTV: $100 x 20 months x 80% = $1,600
- LTV/CAC: 8:1 (healthy, >3:1), Payback: 2.5 months (good, <12 months)
- Interpretation: Strong unit economics. Can profitably scale marketing spend.
Workflow
Copy this checklist and track your progress:
Unit Economics Analysis Progress:
- [ ] Step 1: Define the unit
- [ ] Step 2: Calculate CAC
- [ ] Step 3: Calculate LTV
- [ ] Step 4: Assess contribution margin
- [ ] Step 5: Analyze cohorts
- [ ] Step 6: Interpret and recommend
Step 1: Define the unit
What is your unit of analysis? (Customer, product SKU, transaction, subscription). See resources/template.md.
Step 2: Calculate CAC
Total acquisition costs (sales + marketing) ÷ new units acquired. Break down by channel if applicable. See resources/template.md and resources/methodology.md.
Step 3: Calculate LTV
Revenue over unit lifetime minus variable costs. Use cohort data for retention/churn. See resources/template.md and resources/methodology.md.
Step 4: Assess contribution margin
(Revenue - Variable Costs) ÷ Revenue. Identify levers to improve margin. See resources/template.md and resources/methodology.md.
Step 5: Analyze cohorts
Track retention, LTV, payback by customer cohort (acquisition month/channel/segment). See resources/template.md and resources/methodology.md.
Step 6: Interpret and recommend
Assess LTV/CAC ratio, payback period, cash efficiency. Make recommendations (pricing, channels, growth). See resources/template.md and resources/methodology.md.
Validate using resources/evaluators/rubric_financial_unit_economics.json. Minimum standard: Average score ≥ 3.5.
Common Patterns
Pattern 1: SaaS Subscription Model
- Key metrics: MRR, ARR, churn rate, LTV/CAC, payback period, CAC payback
- Calculation: LTV = ARPU × Gross Margin % ÷ Churn Rate
- Benchmarks: LTV/CAC ≥3:1, Payback <12 months, Churn <5% monthly (B2C) or <2% (B2B)
- Levers: Reduce churn (increase LTV), upsell/cross-sell (increase ARPU), optimize channels (reduce CAC)
- When: Subscription business, recurring revenue, retention critical
Pattern 2: E-commerce / Transactional
- Key metrics: AOV (Average Order Value), repeat purchase rate, contribution margin per order, CAC
- Calculation: LTV = AOV × Purchase Frequency × Gross Margin % × Customer Lifetime (years)
- Benchmarks: Contribution margin ≥40%, Repeat purchase rate ≥25%, LTV/CAC ≥2:1
- Levers: Increase AOV (bundling, upsells), drive repeat purchases (loyalty programs), reduce variable costs
- When: Transactional business, e-commerce, retail
Pattern 3: Marketplace / Platform
- Key metrics: Take rate, GMV (Gross Merchandise Value), supply/demand CAC, liquidity
- Calculation: LTV = GMV per user × Take Rate × Gross Margin % ÷ Churn Rate
- Benchmarks: Take rate 10-30%, LTV/CAC ≥3:1 for both sides, network effects kicking in
- Levers: Increase take rate (value-added services), improve matching (increase GMV), balance supply/demand
- When: Two-sided marketplace, platform business
Pattern 4: Freemium / PLG (Product-Led Growth)
- Key metrics: Free-to-paid conversion rate, time to convert, paid user LTV, blended CAC
- Calculation: Blended LTV = (Free users × Conversion % × Paid LTV) - (Free user costs)
- Benchmarks: Conversion ≥2%, Time to convert <90 days, Paid LTV/CAC ≥4:1
- Levers: Increase conversion rate (improve product, optimize paywall), reduce time to value, lower CAC via virality
- When: Product-led growth, freemium model, viral product
Pattern 5: Enterprise / High-Touch Sales
- Key metrics: CAC (including sales team costs), sales cycle length, NRR (Net Revenue Retention), LTV
- Calculation: LTV = ACV (Annual Contract Value) × Gross Margin % × Average Customer Lifetime (years)
- Benchmarks: LTV/CAC ≥3:1, Sales efficiency (ARR added ÷ S&M spend) ≥1.0, NRR ≥110%
- Levers: Shorten sales cycle, increase ACV (upsell, premium tiers), improve retention (NRR)
- When: Enterprise sales, high ACV, long sales cycles
Guardrails
Fully-loaded CAC: Include all acquisition costs (sales salaries, marketing spend, tools, overhead allocation). Excluding sales team salaries is a common miss that inflates perceived economics.
True variable costs: Only include costs that scale with each unit (COGS, hosting per user, transaction fees). Exclude fixed costs (rent, core engineering). Accurate margins are essential for LTV.
Cohort-based LTV: Early cohorts are not the same as recent cohorts. Track retention curves by cohort. Base LTV on observed retention, not assumptions.
Use conservative time horizons: LTV is a prediction. For new products with limited data, weight recent cohorts more heavily and avoid projecting far beyond observed behavior.
Optimize both payback and LTV/CAC: High LTV/CAC but long payback (>18 months) strains cash. Fast payback (<6 months) allows rapid reinvestment.
Analyze at channel level: Blended metrics hide the truth. CAC and LTV vary by channel (paid search vs. referral vs. content). Break down separately to optimize spend.
Retention drives LTV exponentially: Improving monthly churn from 5% to 4% increases LTV by 25%. Retention improvements typically matter more than acquisition improvements.
Gross margin floor: SaaS needs >=60% gross margin, e-commerce >=40%, to be viable. Low margin means even high LTV/CAC ratios yield poor cash flow.
Common pitfalls:
- ❌ Ignoring churn: Assuming customers stay forever. Reality: churn compounds. Use cohort retention curves.
- ❌ Vanity LTV: Using unrealistic retention (e.g., 5 year LTV with 1 month of data). Stick to observed behavior.
- ❌ Blended CAC: Mixing profitable and unprofitable channels. Break down by channel, segment, cohort.
- ❌ Not updating: Unit economics change as product, market, competition evolve. Re-calculate quarterly.
- ❌ Missing costs: Forgetting support costs, payment processing fees, fraud losses, refunds. Track everything.
- ❌ Premature scaling: Growing before unit economics work (LTV/CAC <2:1). "We'll make it up in volume" rarely works.
Quick Reference
Key formulas:
CAC = (Sales + Marketing Costs) ÷ New Customers Acquired
LTV (subscription) = ARPU × Gross Margin % ÷ Monthly Churn Rate
LTV (transactional) = AOV × Purchase Frequency × Gross Margin % × Lifetime (years)
Contribution Margin % = (Revenue - Variable Costs) ÷ Revenue
LTV/CAC Ratio = Lifetime Value ÷ Customer Acquisition Cost
Payback Period (months) = CAC ÷ (Monthly Revenue × Gross Margin %)
CAC Payback (months) = S&M Spend ÷ (New ARR × Gross Margin %)
Gross Margin % = (Revenue - COGS) ÷ Revenue
Customer Lifetime (months) = 1 ÷ Monthly Churn Rate
MRR (Monthly Recurring Revenue) = Sum of all monthly subscriptions
ARR (Annual Recurring Revenue) = MRR × 12
ARPU (Average Revenue Per User) = Total Revenue ÷ Total Users
NRR (Net Revenue Retention) = (Starting ARR + Expansion - Contraction - Churn) ÷ Starting ARR
Benchmarks (varies by stage and industry):
| Metric |
Good |
Acceptable |
Poor |
| LTV/CAC Ratio |
≥5:1 |
3:1 - 5:1 |
<3:1 |
| Payback Period |
<6 months |
6-12 months |
>18 months |
| Gross Margin (SaaS) |
≥80% |
60-80% |
<60% |
| Gross Margin (E-commerce) |
≥50% |
40-50% |
<40% |
| Monthly Churn (B2C SaaS) |
<3% |
3-7% |
>7% |
| Monthly Churn (B2B SaaS) |
<1% |
1-3% |
>3% |
| CAC Payback (SaaS) |
<12 months |
12-18 months |
>18 months |
| NRR (SaaS) |
≥120% |
100-120% |
<100% |
Decision framework:
| LTV/CAC |
Payback |
Recommendation |
| <1:1 |
Any |
Stop: Losing money on every customer. Fix model or pivot. |
| 1:1 - 2:1 |
>12 months |
Caution: Marginal economics. Don't scale yet. Improve retention or reduce CAC. |
| 2:1 - 3:1 |
6-12 months |
Optimize: Unit economics acceptable. Focus on improving before scaling. |
| 3:1 - 5:1 |
<12 months |
Scale: Good economics. Can profitably invest in growth. |
| >5:1 |
<6 months |
Aggressive scale: Excellent economics. Raise capital, increase spend rapidly. |
Inputs required:
- Revenue data: Pricing, ARPU, AOV, transaction frequency
- Cost data: Sales/marketing spend, COGS, variable costs per customer
- Retention data: Churn rate, cohort retention curves, repeat purchase behavior
- Channel data: CAC by acquisition channel, LTV by segment
- Time period: Cohort definition (monthly, quarterly), historical data range
Outputs produced:
unit-economics-analysis.md: Full analysis with CAC, LTV, ratios, cohort breakdownscohort-retention-table.csv: Retention curves by cohortchannel-profitability.csv: CAC and LTV by acquisition channelrecommendations.md: Pricing, channel, growth recommendations based on metrics
1---2name: financial-unit-economics3description: Analyzes profitability per customer, product, or transaction to determine business model viability and scalability. Covers CAC, LTV, contribution margin, cohort analysis, and growth-readiness assessment. Use when evaluating business model viability, validating startup metrics (CAC, LTV, payback period), making pricing decisions, comparing business models, or when user mentions unit economics, CAC/LTV ratio, contribution margin, customer profitability, or break-even analysis.4---5# Financial Unit Economics
6
7## Table of Contents
8- [Workflow](#workflow)
9- [Common Patterns](#common-patterns)
10- [Guardrails](#guardrails)
11- [Quick Reference](#quick-reference)
12
13## Example
14
15**Scenario**: SaaS startup, $100/month subscription
16
17- **CAC**: $20k spend / 100 customers = $200
18- **Gross margin**: ($100 - $20 variable) / $100 = 80%
19- **Monthly churn**: 5% -> Average lifetime = 20 months
20- **LTV**: $100 x 20 months x 80% = $1,600
21- **LTV/CAC**: 8:1 (healthy, >3:1), **Payback**: 2.5 months (good, <12 months)
22- **Interpretation**: Strong unit economics. Can profitably scale marketing spend.
23
24## Workflow
25
26Copy this checklist and track your progress:
27
28```
29Unit Economics Analysis Progress:
30- [ ] Step 1: Define the unit
31- [ ] Step 2: Calculate CAC
32- [ ] Step 3: Calculate LTV
33- [ ] Step 4: Assess contribution margin
34- [ ] Step 5: Analyze cohorts
35- [ ] Step 6: Interpret and recommend
36```
37
38**Step 1: Define the unit**
39
40What is your unit of analysis? (Customer, product SKU, transaction, subscription). See [resources/template.md](resources/template.md#unit-definition-template).
41
42**Step 2: Calculate CAC**
43
44Total acquisition costs (sales + marketing) ÷ new units acquired. Break down by channel if applicable. See [resources/template.md](resources/template.md#cac-calculation-template) and [resources/methodology.md](resources/methodology.md#1-customer-acquisition-cost-cac).
45
46**Step 3: Calculate LTV**
47
48Revenue over unit lifetime minus variable costs. Use cohort data for retention/churn. See [resources/template.md](resources/template.md#ltv-calculation-template) and [resources/methodology.md](resources/methodology.md#2-lifetime-value-ltv).
49
50**Step 4: Assess contribution margin**
51
52(Revenue - Variable Costs) ÷ Revenue. Identify levers to improve margin. See [resources/template.md](resources/template.md#contribution-margin-template) and [resources/methodology.md](resources/methodology.md#3-contribution-margin-analysis).
53
54**Step 5: Analyze cohorts**
55
56Track retention, LTV, payback by customer cohort (acquisition month/channel/segment). See [resources/template.md](resources/template.md#cohort-analysis-template) and [resources/methodology.md](resources/methodology.md#4-cohort-analysis).
57
58**Step 6: Interpret and recommend**
59
60Assess LTV/CAC ratio, payback period, cash efficiency. Make recommendations (pricing, channels, growth). See [resources/template.md](resources/template.md#interpretation-template) and [resources/methodology.md](resources/methodology.md#5-interpreting-unit-economics).
61
62Validate using [resources/evaluators/rubric_financial_unit_economics.json](resources/evaluators/rubric_financial_unit_economics.json). **Minimum standard**: Average score ≥ 3.5.
63
64## Common Patterns
65
66**Pattern 1: SaaS Subscription Model**
67- **Key metrics**: MRR, ARR, churn rate, LTV/CAC, payback period, CAC payback
68- **Calculation**: LTV = ARPU × Gross Margin % ÷ Churn Rate
69- **Benchmarks**: LTV/CAC ≥3:1, Payback <12 months, Churn <5% monthly (B2C) or <2% (B2B)
70- **Levers**: Reduce churn (increase LTV), upsell/cross-sell (increase ARPU), optimize channels (reduce CAC)
71- **When**: Subscription business, recurring revenue, retention critical
72
73**Pattern 2: E-commerce / Transactional**
74- **Key metrics**: AOV (Average Order Value), repeat purchase rate, contribution margin per order, CAC
75- **Calculation**: LTV = AOV × Purchase Frequency × Gross Margin % × Customer Lifetime (years)
76- **Benchmarks**: Contribution margin ≥40%, Repeat purchase rate ≥25%, LTV/CAC ≥2:1
77- **Levers**: Increase AOV (bundling, upsells), drive repeat purchases (loyalty programs), reduce variable costs
78- **When**: Transactional business, e-commerce, retail
79
80**Pattern 3: Marketplace / Platform**
81- **Key metrics**: Take rate, GMV (Gross Merchandise Value), supply/demand CAC, liquidity
82- **Calculation**: LTV = GMV per user × Take Rate × Gross Margin % ÷ Churn Rate
83- **Benchmarks**: Take rate 10-30%, LTV/CAC ≥3:1 for both sides, network effects kicking in
84- **Levers**: Increase take rate (value-added services), improve matching (increase GMV), balance supply/demand
85- **When**: Two-sided marketplace, platform business
86
87**Pattern 4: Freemium / PLG (Product-Led Growth)**
88- **Key metrics**: Free-to-paid conversion rate, time to convert, paid user LTV, blended CAC
89- **Calculation**: Blended LTV = (Free users × Conversion % × Paid LTV) - (Free user costs)
90- **Benchmarks**: Conversion ≥2%, Time to convert <90 days, Paid LTV/CAC ≥4:1
91- **Levers**: Increase conversion rate (improve product, optimize paywall), reduce time to value, lower CAC via virality
92- **When**: Product-led growth, freemium model, viral product
93
94**Pattern 5: Enterprise / High-Touch Sales**
95- **Key metrics**: CAC (including sales team costs), sales cycle length, NRR (Net Revenue Retention), LTV
96- **Calculation**: LTV = ACV (Annual Contract Value) × Gross Margin % × Average Customer Lifetime (years)
97- **Benchmarks**: LTV/CAC ≥3:1, Sales efficiency (ARR added ÷ S&M spend) ≥1.0, NRR ≥110%
98- **Levers**: Shorten sales cycle, increase ACV (upsell, premium tiers), improve retention (NRR)
99- **When**: Enterprise sales, high ACV, long sales cycles
100
101## Guardrails
102
1031. **Fully-loaded CAC**: Include all acquisition costs (sales salaries, marketing spend, tools, overhead allocation). Excluding sales team salaries is a common miss that inflates perceived economics.
104
1052. **True variable costs**: Only include costs that scale with each unit (COGS, hosting per user, transaction fees). Exclude fixed costs (rent, core engineering). Accurate margins are essential for LTV.
106
1073. **Cohort-based LTV**: Early cohorts are not the same as recent cohorts. Track retention curves by cohort. Base LTV on observed retention, not assumptions.
108
1094. **Use conservative time horizons**: LTV is a prediction. For new products with limited data, weight recent cohorts more heavily and avoid projecting far beyond observed behavior.
110
1115. **Optimize both payback and LTV/CAC**: High LTV/CAC but long payback (>18 months) strains cash. Fast payback (<6 months) allows rapid reinvestment.
112
1136. **Analyze at channel level**: Blended metrics hide the truth. CAC and LTV vary by channel (paid search vs. referral vs. content). Break down separately to optimize spend.
114
1157. **Retention drives LTV exponentially**: Improving monthly churn from 5% to 4% increases LTV by 25%. Retention improvements typically matter more than acquisition improvements.
116
1178. **Gross margin floor**: SaaS needs >=60% gross margin, e-commerce >=40%, to be viable. Low margin means even high LTV/CAC ratios yield poor cash flow.
118
119**Common pitfalls:**
120
121- ❌ **Ignoring churn**: Assuming customers stay forever. Reality: churn compounds. Use cohort retention curves.
122- ❌ **Vanity LTV**: Using unrealistic retention (e.g., 5 year LTV with 1 month of data). Stick to observed behavior.
123- ❌ **Blended CAC**: Mixing profitable and unprofitable channels. Break down by channel, segment, cohort.
124- ❌ **Not updating**: Unit economics change as product, market, competition evolve. Re-calculate quarterly.
125- ❌ **Missing costs**: Forgetting support costs, payment processing fees, fraud losses, refunds. Track everything.
126- ❌ **Premature scaling**: Growing before unit economics work (LTV/CAC <2:1). "We'll make it up in volume" rarely works.
127
128## Quick Reference
129
130**Key formulas:**
131
132```
133CAC = (Sales + Marketing Costs) ÷ New Customers Acquired
134
135LTV (subscription) = ARPU × Gross Margin % ÷ Monthly Churn Rate
136
137LTV (transactional) = AOV × Purchase Frequency × Gross Margin % × Lifetime (years)
138
139Contribution Margin % = (Revenue - Variable Costs) ÷ Revenue
140
141LTV/CAC Ratio = Lifetime Value ÷ Customer Acquisition Cost
142
143Payback Period (months) = CAC ÷ (Monthly Revenue × Gross Margin %)
144
145CAC Payback (months) = S&M Spend ÷ (New ARR × Gross Margin %)
146
147Gross Margin % = (Revenue - COGS) ÷ Revenue
148
149Customer Lifetime (months) = 1 ÷ Monthly Churn Rate
150
151MRR (Monthly Recurring Revenue) = Sum of all monthly subscriptions
152
153ARR (Annual Recurring Revenue) = MRR × 12
154
155ARPU (Average Revenue Per User) = Total Revenue ÷ Total Users
156
157NRR (Net Revenue Retention) = (Starting ARR + Expansion - Contraction - Churn) ÷ Starting ARR
158```
159
160**Benchmarks (varies by stage and industry):**
161
162| Metric | Good | Acceptable | Poor |
163|--------|------|------------|------|
164| **LTV/CAC Ratio** | ≥5:1 | 3:1 - 5:1 | <3:1 |
165| **Payback Period** | <6 months | 6-12 months | >18 months |
166| **Gross Margin (SaaS)** | ≥80% | 60-80% | <60% |
167| **Gross Margin (E-commerce)** | ≥50% | 40-50% | <40% |
168| **Monthly Churn (B2C SaaS)** | <3% | 3-7% | >7% |
169| **Monthly Churn (B2B SaaS)** | <1% | 1-3% | >3% |
170| **CAC Payback (SaaS)** | <12 months | 12-18 months | >18 months |
171| **NRR (SaaS)** | ≥120% | 100-120% | <100% |
172
173**Decision framework:**
174
175| LTV/CAC | Payback | Recommendation |
176|---------|---------|----------------|
177| <1:1 | Any | **Stop**: Losing money on every customer. Fix model or pivot. |
178| 1:1 - 2:1 | >12 months | **Caution**: Marginal economics. Don't scale yet. Improve retention or reduce CAC. |
179| 2:1 - 3:1 | 6-12 months | **Optimize**: Unit economics acceptable. Focus on improving before scaling. |
180| 3:1 - 5:1 | <12 months | **Scale**: Good economics. Can profitably invest in growth. |
181| >5:1 | <6 months | **Aggressive scale**: Excellent economics. Raise capital, increase spend rapidly. |
182
183**Inputs required:**
184- **Revenue data**: Pricing, ARPU, AOV, transaction frequency
185- **Cost data**: Sales/marketing spend, COGS, variable costs per customer
186- **Retention data**: Churn rate, cohort retention curves, repeat purchase behavior
187- **Channel data**: CAC by acquisition channel, LTV by segment
188- **Time period**: Cohort definition (monthly, quarterly), historical data range
189
190**Outputs produced:**
191- `unit-economics-analysis.md`: Full analysis with CAC, LTV, ratios, cohort breakdowns
192- `cohort-retention-table.csv`: Retention curves by cohort
193- `channel-profitability.csv`: CAC and LTV by acquisition channel
194- `recommendations.md`: Pricing, channel, growth recommendations based on metrics
lyndonkl