Software Growth

Unit economics

Unit economics measures the revenue and costs of a single unit, usually one customer, to show whether each sale makes or loses money.

Unit economics looks at one customer (or one account, or one seat) and asks whether the business makes money on them. Total revenue and total profit can hide a broken model, especially in a fast-growing company. Per-customer numbers show the truth sooner.

David Skok frames it as a single question: can you make more profit from your customers than it costs to acquire them? He names two metrics as the core of the answer, customer lifetime value and customer acquisition cost.

The pieces

  • Revenue per customer. Monthly ARPA or annual contract value.
  • Cost to serve. Hosting, support and payment fees, which sit in COGS and give you gross margin.
  • Cost to acquire. CAC.
  • How long they stay. Driven by churn, which turns monthly profit into lifetime value.

A worked example

A tool sells for $50 per month. Serving each customer costs $10 (hosting, support, card fees), so gross profit is $40, an 80% margin. Monthly churn is 4%, so the average customer stays 25 months. Acquiring one customer costs $300.

Each customer returns about $700 over their life after paying back acquisition. The LTV:CAC ratio and payback period are the two summary numbers most people quote.

How Skok describes the cash curve

Skok points out that a business can have healthy unit economics and still lose money for a while, because you pay for acquisition up front and recover it over months. Cash flow turns positive once the profit from existing customers covers the investment in new ones, as long as you do not keep raising acquisition spend. That is why a growing company with great unit economics can look unprofitable on paper.

Common mistakes

  • Using revenue instead of gross profit when calculating lifetime value.
  • Leaving the founder's time out of CAC.
  • Mixing segments. Unit economics for $10 plans and $500 plans should be separate.
  • Trusting churn from only a few months of data.
  • Calling it done once the ratio looks good, without checking that you can still afford the cash gap.

For small SaaS

If you run a small product, redo this math every quarter and by channel. Raising your price by $10 or lowering churn by one point often moves the numbers more than any marketing change. Unit economics also sets your ceiling: if the numbers are weak, more customers just means a larger loss.

Questions to ask each quarter

  • Does a new customer repay CAC before the typical customer churns?
  • Which plan or segment has the best ratio, and can you sell more of it?
  • If you raised prices by 10%, how many fewer customers could you afford to win?
  • What happens to gross margin if usage doubles?

Answering these with real numbers is more useful than debating whether a ratio is good in general. Write the answers down, and your pricing and channel decisions will start to follow from them.

Sources

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