Sample frameDay 007·Finance · Business Model

Good morning. Every business decision has a unit underneath it. Most people never look.

Finance.

Unit Economics

6 min read·Apply by lunch

The question

Do you know the LTV and CAC of your business — and does the ratio justify your current growth spend?

The idea

Unit economics is the financial analysis of a single unit of your business — one customer, one transaction, one product — to understand whether the business model actually works at the individual level before you scale it. A company can grow revenue while destroying value if the economics at the unit level are broken. Amazon understood this: early losses were an investment in infrastructure that would make each unit cheaper over time. WeWork didn't: their unit economics never worked, at any scale, under any scenario. The discipline of unit economics forces you to answer the question that growth metrics obscure: for every customer you acquire, do you make money or lose it?

The framework

01
Customer Acquisition Cost (CAC): what you pay to get one customer.
CAC is total sales and marketing spend divided by the number of new customers acquired in the same period. If you spent $100k on sales and marketing last quarter and acquired 200 customers, your CAC is $500. The trap: most companies undercount CAC by only including media spend and ignoring salaries, tools, agencies, and overhead. Fully-loaded CAC is always higher than it looks. CAC should be calculated by channel — your paid search CAC and your referral CAC are different numbers and require different decisions.
02
Customer Lifetime Value (LTV): what one customer is worth.
LTV is the net revenue you expect from a customer over the entire relationship. Simple version: average order value × purchase frequency × gross margin × average customer lifespan. Subscription version: average monthly revenue per customer × gross margin ÷ monthly churn rate. LTV is a forward-looking estimate — it's always uncertain. The key levers are margin (higher is better), retention (longer relationships compound dramatically), and expansion revenue (customers who spend more over time are the engine of LTV improvement).
03
The LTV:CAC ratio — the health check.
LTV:CAC is the diagnostic ratio that tells you whether your business model works. Below 1:1 — you're destroying value with every customer. 1:1 to 3:1 — viable but not efficient; growth will be expensive and slow. 3:1 — the benchmark most investors use as the minimum for a scalable business. Above 5:1 — strong unit economics; you may be under-investing in growth. The ratio doesn't tell you to grow — it tells you whether growing will make you money or accelerate losses. Many hypergrowth companies that collapse had great revenue and terrible LTV:CAC.
04
Payback period: how long until you get your CAC back.
Payback period is CAC divided by monthly contribution margin per customer — the number of months until a new customer has paid back what it cost to acquire them. A 6-month payback means every dollar of CAC is recovered in 6 months; 18 months means you're funding growth with capital for a year and a half before breaking even at the unit level. In high-growth environments, shorter payback periods are self-funding; long payback periods require continuous capital. The payback period is often the most operationally actionable unit economics metric because it directly frames cash flow.

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