The Unit Economics Reckoning
Core Argument: Scaling before your unit economics are solved is pouring gasoline on a fire in your own house. Bad economics do not improve with volume - they accelerate toward failure.
The Growth Illusion
Revenue growth is intoxicating. The MRR chart goes up. Customers are signing. Investors are interested.
And beneath the surface, the company is dying.
The pattern: A startup reaches $50k, $100k, $200k MRR - and runs out of money. The revenue was real. The customers were real. But the unit economics were broken. Every customer cost more to acquire and serve than they would ever pay.
Growth with broken economics is accelerated death.
Over 40% of SaaS companies fail to achieve profitability even after reaching $10M ARR. They grew their way into bankruptcy.
The Three Numbers That Matter
1. Customer Acquisition Cost (CAC)
Definition: The total cost to acquire one customer, including all sales and marketing expense.
Common Mistakes: Excluding founder time, excluding marketing overhead, counting freemium signups as "customers."
The Reality: If you would need to spend it at scale, count it now.
2. Lifetime Value (LTV)
Definition: The total revenue a customer generates over their entire relationship.
Calculation: ARPA × Gross Margin × Customer Lifetime
At early stage: You do not have enough data for true LTV. Use conservative estimates based on current retention.
3. CAC Payback Period
Definition: How many months until a customer's payments cover their acquisition cost.
Calculation: CAC ÷ (ARPA × Gross Margin)
This is the metric that determines whether you have permission to scale.
The CAC Payback Threshold
| Stage | Maximum Acceptable Payback |
|---|---|
| Pre-Seed / Seed | 6-9 months |
| Series A | 12-15 months |
| Series B+ | 18-24 months |
If your payback exceeds the threshold for your stage, you do not have permission to scale.
The Churn Tax
Churn creates an implicit increase in CAC. If 20% of customers churn before payback completes, your effective CAC is 25% higher than your stated CAC.
Effective CAC = Stated CAC ÷ (1 - Probability of Early Churn)
The LTV:CAC Ratio
The traditional benchmark is LTV:CAC of 3:1. But at early stage, this ratio is less useful than CAC Payback because you don't have reliable LTV data.
Focus on payback first. LTV:CAC becomes relevant at scale.
Fixing Broken Economics
If CAC is too high:
- Improve conversion rates (messaging, targeting, sales process)
- Reduce cost per lead (channel optimization, better qualification)
- Shorten sales cycle (better qualification, urgency creation)
If LTV is too low:
- Increase price (often the fastest fix)
- Reduce churn (product, onboarding, success)
- Expand revenue (upsells, cross-sells, usage-based)
Conclusion: Economics Before Scale
The Unit Economics Reckoning is not optional. It is the diagnostic that determines whether growth creates value or destroys it.
Before you scale, answer one question: Do the economics work?
If yes, pour fuel on the fire. If no, fix the economics first. Scale amplifies whatever exists. Make sure what exists is worth amplifying.