Unit economics are the direct revenues and costs on a per unit basis. For a consumer Internet company the unit is a user.
CAC – Cost of Customer Acquisition – what does it cost you to acquire a customer?
Repeat Rate – how often to your customers come back i.e. to your web site or your app?
LTV – Lifetime Value – how much will a customer spend over the total time they use your product or service?
For a raw startup all three metrics are pure projections, which are rarely worth the bits it takes to present them. But once your product has launched and you have developed sales traction, you need to keep track of these numbers, as they are the key to scaling. For early stage companies CAC will always be high as a percentage of operating expenses. The objective is to drive this number down over time through economies of scale and more efficient marketing.
Conversely you want to drive the Repeat Rate up. If customers only come to your ecommerce site once a quarter, unless you are selling something very expensive, the LTV, Lifetime Value will be too low. In other words if the CAC exceeds the LTV you have a money losing venture!
As your company goes from raw startup to product launch to revenue generation to break-even these unit economics should all be improving: CAC should be going down, Repeat Rate going up, and LTV going up. Investors will study these numbers, along with your financial assumptions, when deciding whether or not to invest in your company. You will want to provide them with a graph of unit economics on a monthly basis, along with other metrics such as total revenue, gross margin, and operating costs.
While the customer represents a unit for a consumer internet company, the staff member can represent a unit of operating costs, as salaries and benefits are the number one cost in high tech companies. The simplest ratio is company revenue divided by headcount. This ratio needs to increase as you scale and increase efficiency of operations. A mature software company should have a number in the range of mid six figures per employee. However, the current use of large numbers of contractors by many tech companies has driven the typical ratio of revenue to number of full time employees far higher than in the past.
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