UzCombinator
UZ
EN
Startup School
Curriculum0/19
Module 1
Idea and problem
  1. 1What a startup is, and how it differs from a small business4 min
  2. 2Finding a real problem4 min
  3. 3Judging an idea: market, timing and team4 min
  4. 4Co-founders and the team4 min
Module 2
Customers and validation
  1. 5How to run a customer interview5 min
  2. 6Who your first users are4 min
  3. 7Testing demand cheaply5 min
Module 3
Building the MVP
  1. 8What an MVP is, and what it is not4 min
  2. 9Building fast: code, no-code and ready-made tools4 min
  3. 10Launching and collecting feedback4 min
  4. 11Signs of product-market fit4 min
Module 4
Growth and metrics
  1. 12Choosing the metric that matters4 min
  2. 13Unit economics: CAC, LTV and margin4 min
  3. 14Your first growth channels4 min
  4. 15Keeping your users4 min
Module 5
Fundraising and pitching
  1. 16Do you need funding? Stages and sources4 min
  2. 17Building a pitch deck4 min
  3. 18Meeting investors4 min
  4. 19Terms and valuation basics4 min
Module 4Lesson 134 min

Unit economics: CAC, LTV and margin

Growth and metrics
Working out what it costs to win a customer and what that customer is worth.
A startup can win lots of customers and still lose money. If each customer costs more to win than they bring in, growth only makes the problem bigger. Unit economics shows how the business works at the level of a single customer, and answers whether growth will make money or not.

Three key ideas

  • Customer acquisition cost (CAC). Divide the total spent on marketing and sales in a period by the number of new customers in that period. It includes advertising, sales staff salaries and the cost of travelling to meetings.
  • Gross margin. Take what the customer pays and subtract the direct cost of serving them: servers, SMS, payment provider fees, support time.
  • Lifetime value (LTV). The gross margin one customer brings over the whole time they stay with you. Roughly: monthly margin multiplied by the average number of months a customer stays.

A simple example

The numbers below are made up, purely to show how the calculation works.
A service for shops costs 150,000 so‘m a month. The direct cost of serving one customer is 30,000 so‘m a month. So the monthly gross margin is 120,000 so‘m.
Each month roughly one in ten customers leaves. In that case a customer stays about ten months on average, because the average lifetime is roughly the inverse of the monthly share who leave. So LTV is about 120,000 × 10 = 1,200,000 so‘m.
Last month 6,000,000 so‘m went on advertising and sales, and ten new customers arrived. CAC = 600,000 so‘m.
The result: each customer brings in twice as much margin as was spent to win them. The acquisition cost is paid back in five months: 600,000 divided by 120,000 is five.

How to read the numbers

  • LTV should be clearly larger than CAC. Otherwise every new customer makes you poorer.
  • The shorter the payback period, the better. A long one needs more cash, because you carry the cost until the customer has paid it back.
  • If margin is low, growth is hard too: little money is left from each customer.

Be careful at an early stage

At first the numbers are unstable: few customers, data from a short period. You often win your first customers by hand, through personal connections, and that may not repeat in later channels. So do not over-optimise the numbers. But know the direction: are your unit economics improving over time, or getting worse?

Hidden costs

Many founders forget a few costs:
  • payment provider fees. Check the exact percentage in your own provider's contract;
  • refunds and unpaid invoices;
  • time spent on customer support, especially your own;
  • salespeople's travel and meeting costs;
  • taxes. Work out with an accountant which taxes apply and at what rates.
Count the founder's own time too. If you personally spend two hours training each customer, that is an acquisition cost as well; you are just not paying for it yet.

A note on price

Many early startups set prices too low because they fear rejection. A low price wrecks unit economics, and raising it later is hard. Set the price according to the value the customer receives, not your own costs. If nobody ever objects to your price, it is probably too low.

How to improve unit economics

  • Revisit your price, or add a more expensive plan that gives more value.
  • Reduce churn: every extra month a customer stays raises LTV.
  • Find cheaper channels, such as referrals and partnerships.
  • Cut the cost of serving customers: ready answers to common questions, automated reminders.
  • Offer annual or multi-month prepayment. It does not change the margin, but it noticeably improves cash flow.

Try this

Calculate CAC, monthly gross margin and an estimated LTV for your current customers. Note what data each number is based on, and mark which one is the least certain. Plan to measure exactly that number more precisely next month.