Unit Economics
Audit LTV:CAC ratios and metrics to ensure a profitable business model
1 step
Validating the Absolute Baseline (ARPU vs. CAC)
Identify your primary revenue drivers and determine if you have reached "1st Cosmic Velocity."
The first high-stakes problem a founder faces in the "Test Stage" is the lack of "Economic Truth." You must move beyond total revenue to look at the economics of a single unit (one user). As established by strategist Ilya Krasinsky, your first goal is to achieve "1st Cosmic Velocity", which is defined by the inequality ARPU > CAC. If the average revenue you generate from a single user is not higher than the cost to acquire them, your business is technically insolvent. Every new customer you gain in this state actually brings you closer to bankruptcy.
To conduct this audit, you must first distinguish between ARPU (Average Revenue Per User) and ARPPU (Average Revenue Per Paying User). ARPU measures a customer's average contribution to revenue across your entire base; it is calculated as Total Revenue / Total Subscribers. ARPPU, however, only accounts for those who have actually opened their wallets. This distinction is vital for "Freemium" or "Free-to-Play" models where a large base of free users must be supported by a small percentage of high-value "Payers." You must also calculate your CAC (Customer Acquisition Cost), which is the Total cost of Sales and Marketing / # of Customers Acquired.
A rising ARPU level is a strong indicator of increasing sales efficiency or greater pricing power. If your ARPU is $0.60 (the market average for some iOS segments) but your CAC is $1.00, you are below 1st Cosmic Velocity. You are effectively "buying a dollar for a dollar and forty cents." Your audit must confirm that your "Action Driver" (whether it’s product features or individual solutions) allows you to bridge this gap. If you are below 1st Cosmic Velocity, you must stop all growth spending and proceed to Step 2 to diagnose the mismatch.
Pro Tips:
ARPU > CAC is the minimum requirement for a viable business.
Differentiate between active and registered users to avoid vanity ARPU.
Focus on rising ARPU as a sign of increasing pricing power.
If below 1st Cosmic Velocity, your model is a hobby, not a business.
2 step
Mapping the ARPU <-> CAC Spectrum and Friction Zone
Analyze the relationship between your acquisition costs and your monetization strategy to avoid the "Danger Zone."
Success in unit economics requires a structural match between how you get customers and how much they pay. According to the Click Ventures Playbook, you must plot your startup on the ARPU <-> CAC Spectrum. This spectrum identifies two successful archetypes and one fatal trap.
On the Low-ARPU / Low-CAC end, you find businesses driven by virality, B2C SEO, and self-service (e.g., WhatsApp, Yelp, Slack). If your revenue per user is low, your acquisition must be frictionless and automated. On the High-ARPU / High-CAC end, you find "Enterprise Sales" (e.g., Palantir, Veeva). These businesses require "Individual Approaches" with phone calls and personal visits, but the deal size is large enough (often >$20k) to justify the high headcount cost.
The "Danger Zone" occurs when you have Low ARPU but High CAC. This is the Friction Zone. It happens when your monetization process is too complex or "high-friction" to take advantage of low-cost viral channels, but your revenue isn't high enough to pay for a sales team. For example, if you are building a B2C app but it requires a 40-minute "Cafe User Study" to onboard every user, you are in the Friction Zone. Your CAC will stay high while your ARPU remains low. To escape this zone, you must either automate your onboarding to lower the CAC or "Customize" the product to a high-value niche to increase the ARPU. You must ensure that your "Product Type" (standardized tool vs. complex solution) matches the "Sales System" you have implemented. If you have an "Enterprise" sales structure for a "Consumer" price point, your capital efficiency will be zero.
Pro Tips:
Avoid high-touch individual approaches for low-margin products.
Match your "Action Driver" to your position on the spectrum.
Identify if your monetization is "Direct" or "Delayed" (e.g., advertising).
Don't use expensive sales teams for products with a CLV under $500.
3 step
Calculating LTV and the "Golden" 3:1 Ratio
Apply the "Golden Idea" of profitability to determine your long-term sustainability and "2nd Cosmic Velocity."
The LTV:CAC Ratio is the ultimate measure of a startup’s profitability and sustainability. While Step 1 looked at the first transaction, this step focuses on "2nd Cosmic Velocity"—Repeat Sales. According to the curriculum, repeat sales are only possible if you have high Retention over a long period. You must determine if you are a "Sustainable Machine" or just a "Temporary Spike."
To calculate LTV (Lifetime Value), you must use a formula that accounts for your margins. The curriculum suggests: LTV = GML x (R / (1 + D - R)), where GML is the Gross Margin per Lifetime and R is your Retention Rate. In simple terms, LTV is the total profit a customer brings before they churn. You must know your Gross Margins (Revenue minus COGS). The median gross margin for successful SaaS companies is approximately 76%. If your margins are lower, your LTV is significantly harder to scale.
The industry "Barometer" for success is a ratio of 3:1. The value of a customer must be at least three times higher than the cost of acquiring them. If your ratio is 1:1, you are barely breaking even and cannot afford to pay for development, office space, or founder salaries. If your ratio is above 5:1, you may be growing too slowly and leaving the market open to competitors. You must also track your Payback Period—the number of months it takes to recover your CAC. For SMB (Small Business) products, the target is 6–18 months. For Enterprise, it can be 24–36 months. Any payback period over 36 months is considered "Trouble." This ratio tells investors exactly how much "Fuel" (Capital) they should put into your engine. If $1 in gets $3 out over 12 months, you are ready for a Seed or Series A round.
Pro Tips:
The ideal LTV:CAC ratio is 3:1; use this as your primary "Scale Gate."
Ideally, recover your acquisition cost within the first 12 months.
High Gross Margins (>70%) are the foundation of high LTV.
Use LTV as a barometer to decide how much more you can afford to spend on ads.
4 step
Finalizing the Profitability Roadmap
Conduct a Sensitivity Analysis and establish your cash "Runway" to prepare for your next financing round.
The final step in your unit economics audit is the creation of a Profitability Roadmap. This is where you move from "speculative" numbers to a "Fact-based" forecast of your business. You must perform a Breakeven Analysis to identify the exact stage at which your revenue equals your costs and profit generation begins. If your breakeven point requires too many units (e.g., 1 million users for a $1 product), you must consider whether your product is too expensive to operate or too cheap to sell.
You must also understand your Runway—the amount of time your company can continue to operate on existing cash without going into the red. Your runway is entirely dependent on your Burn Rate (Net burn = cash out minus cash in). In the Seed to Series A stage, the typical recommendation is to keep 1 to 1.5 years of runway available. According to the industry data provided, the median time lapse from Seed to Series A is 15 months. If your runway is only 6 months, you are in a high-risk position and must focus 100% of your energy on "Monetization" rather than "Discovery."
Finally, conduct a Sensitivity Analysis. Ask: "What if our CAC increases by 20%?" or "What if our Gross Margin drops to 50%?" By testing these scenarios, you give yourself and your investors credibility. You move from the "Salmon" lifecycle (focused only on profit/stability) to the "Dolphin" lifecycle (focused on high-speed growth and long-term dominance). This roadmap transforms your unit economics from a spreadsheet into an investment thesis. You can now present a clear "Use of Proceeds" chart, showing that 50% of your raise will go toward "Rapid User Base Growth" because you have mathematically proven that your machine is efficient.
Pro Tips:
Keep 1 to 1.5 years of runway when you begin your next round of financing.
The median lapse between Seed and Series A is shorter than between Series A and B.
Use breakeven analysis early to decide if your pricing is sustainable.
Sensitivity analysis proves to investors that you understand the risks of your market.
Expected Results
Shorten CAC Payback period and optimize Paid CAC by 20% by reallocating budget from non-profitable channels to high-LTV sources.
Deliverables
A live sheet showing ARPU, CAC, LTV, and Payback.
A breakeven forecast and 18-month runway plan.
Behavioral definitions of users at risk of leaving.