Growth is only valuable if each new customer is worth more than it costs to acquire. That sounds obvious, but many companies cannot answer the question by channel, segment or product, and the averages they report hide both the best opportunities and the most expensive mistakes.
Three numbers, one curve
- CAC, customer acquisition cost: everything spent to win one customer in a channel, including the sales team, not only the advertising.
- Contribution per month: what the customer leaves after variable costs, not revenue.
- Retention: the share of customers who stay from one month to the next.
Start each curve at minus the acquisition cost and add the expected contribution month by month, weighted by retention. The month where the curve crosses zero is the payback; its height after three years is the value the customer created over that horizon.
What the curves say that the ratio hides
Referrals are cheap and pay back in five months: the best channel to scale as far as it will go. Outbound sales costs three times more than paid search and takes fifteen months to pay back, but its customers stay longer and spend more, and after three years each one is worth almost four times as much. Paid search looks acceptable on an average ratio, yet it takes over a year to recover its cost and creates the least value of the three.
Making unit economics credible
- Use contribution, not revenue, and include discounts, payment fees, support and returns.
- Measure retention by cohort, from real customers, instead of assuming a lifetime.
- Cap the horizon at three to five years; value promised beyond that is rarely collected.
- Report by channel and segment, because the average of a great channel and a bad one is a misleading number.
Honest unit economics change growth strategy. They show where to put the next dollar of acquisition, how much cash growth will need and which channels to fix or close, and they give the board a reason to believe the plan.
Bartor S.
Founder
