Unit economics

Two delivery businesses are both growing twenty percent a month. One of them loses 4 on every order and is therefore losing more money every month than the month before, on purpose, in public, to applause.

You cannot tell which is which from the growth rate. You can tell instantly from one customer.

The four numbers

Price. What one customer pays, per period.

Cost to serve. What it costs to deliver to that one customer, per period. Not the rent. Not the salaries of people who would be there anyway. The costs that exist because this customer exists.

Cost to acquire. Everything spent winning customers, divided by the number of customers won. Advertising, sales salaries, discounts, the free trial that never converted. All of it, including the money spent on people who said no.

How long they stay. Expressed as churn: the share who leave each month. A five percent monthly churn is a twenty-month average life.

From those you get two figures. Lifetime value is the contribution per period multiplied by the number of periods. And payback is how long you wait before a customer has repaid what they cost to win.

Predict

Two businesses both have a lifetime value of three times their acquisition cost. One gets its money back in 4 months, the other in 26. Which difference matters more to whether the business survives?

Choose one answer

Neither — the ratio is the same, so the economics are the sameThe payback period, decisivelyThe ratio, because it decides whether a customer is profitable at allIt depends on the churn rate

Lock in answer

One customer, all the way through

The model runs a single customer from the day they cost you money to the day they leave. The controls are the four numbers.

Unit economics

≈ Hypothetical model, not a forecast

What one customer contributes, what one costs to acquire, and how long the two take to meet.

It assumes

• Every customer pays the same price and costs the same to serve.
• The same share of remaining customers leaves at the end of every month.
• The acquisition cost is paid in full before the first payment arrives.
• Nothing is discounted, so a payment in month thirty counts as a payment today.

It ignores

• Fixed overheads, which unit economics deliberately leave out
• Discounting, so a payment in month sixty counts the same as one today
• Price rises, upsell, downgrade and win-back
• That acquisition cost usually rises as the easy customers run out

Find a churn rate at which this customer never repays what they cost to acquire — not in thirty-six months, not ever, however patient you are.

Customers lost each month1,000%

Contribution a month

60

Contribution margin

0.6

Expected months as a customer

10

Lifetime value

600

Lifetime value against acquisition cost

2

Payback ignoring churn

5

Payback allowing for churn

7

Payback happens inside the horizon

1

• Net position per customer
• Contribution collected

◷ Not there yet — keep moving the controls.

Above about twenty percent monthly churn, the customer is a permanent loss. Not a slow payback — a loss. The business can grow at any rate it likes and every point of that growth makes the hole deeper.

Notice also the two payback figures in the summary. Ignoring churn, this customer repays in five months. Allowing for churn, seven. The second number is the true one, and the first is the one that appears in plans, because it is the one you get by dividing two numbers you already have.

Not the same thing

Lifetime value over acquisition cost

Whether a customer is worth more than they cost, summed over their whole life.

Measured in

A ratio, unitless

For example

A customer worth 600 who cost 300 to win: a ratio of two.

Chase it alone and

Optimise it alone and you will happily accept a customer who repays over four years, which is a promise about a future you cannot fund.

Payback period

How many months pass before a customer has returned what they cost to win.

Measured in

Months

For example

A customer contributing 60 a month who cost 300: seven months, once churn is allowed for.

Chase it alone and

Optimise it alone and you will reject customers who take a year to repay and then stay for eight, which is most of the good ones.

Which is which? Put each one on a side.

• Deciding whether to keep spending on a marketing channel this quarter

  Lifetime value over acquisition costPayback period

• Deciding whether the business is fundamentally viable at all

  Lifetime value over acquisition costPayback period

• Explaining why a profitable-looking company keeps needing money

  Lifetime value over acquisition costPayback period

What unit economics deliberately leave out

Everything fixed. The rent, the founders' salaries, the accounting software, the office plants. None of it appears in the four numbers, and that is not an oversight — it is the whole design. Unit economics answer one question, which is whether the marginal customer is worth having, and mixing in the cost of existing makes that question unanswerable.

Which means the reverse trap is real too.

Check

A business has excellent unit economics: every customer repays in three months and is worth six times what they cost. It is losing money heavily. What is the most likely explanation?

Choose one answer

The unit economics must be calculated wronglyFixed costs are far larger than the total contribution from the customers it hasIt is spending too much acquiring customersChurn is worse than reported

Check answer

›The number that gets fiddled without anyone lyingOptional

Acquisition cost is the softest of the four, because its denominator is a judgement.

Divide marketing spend by all new customers and you get a flattering number, because some of those customers would have arrived anyway — through word of mouth, through search, through a friend. Divide it by only the customers the spending caused and you get an honest number, and a much larger one, and no reliable way to identify them.

Nobody has to be dishonest for the first number to be the one in the deck. It is easier to compute, it is defensible, and it is smaller.

Worth remembering

• Unit economics shrink a business to one customer: what they pay, what they cost to serve, what they cost to acquire, and how long they stay.
• Acquisition cost must include the money spent on the people who said no, or the number flatters.
• Lifetime value over acquisition cost answers whether a customer is worth having; payback period answers whether you can afford to keep buying them.
• Total contribution over a customer's life is roughly the monthly contribution divided by the monthly churn rate.
• Unit economics deliberately exclude fixed costs, so a business can have excellent ones and still lose money heavily.