Sunflower Intelligence
Learn

Plate 18 of 19 · Marketing

Unit economics and experiments

About 7 minutes to read, then three questions that count toward your mastery.

Is each customer worth more than it costs to win? Lifetime value against acquisition cost, how fast that cost comes back, and how to read a test of a new idea.

The idea

A subscriber pays every month until they cancel. The gross profit they bring each month is revenue × gross margin, and if a share c of customers cancels each month, the average customer stays 1 ÷ c months. Lifetime value (LTV) is that monthly gross profit × the lifetime.

Customer acquisition cost (CAC) is sales and marketing spend ÷ customers won. An LTV:CAC of 3 or more is the usual comfort zone, and payback (CAC ÷ monthly gross profit) says how many months the cost takes to come back. Net revenue retention follows last year’s customers: above 100% means their upgrades outweigh cancellations.

Growth ideas get tested. An A/B test’s p-value is the chance of a gap at least this large if the two versions were really the same; it is not the chance that B is better. To detect a lift half the size, you need about four times the visitors, because the sample grows with 1 ÷ (lift)².

The formula

LTV = revenue per month × marginmonthly churn, CAC = acquisition spendcustomers won, payback = CACrevenue per month × margin

margin
gross margin: the share of revenue left after the cost of serving the customer
churn
the share of customers who cancel each month
LTV:CAC
gross profit a customer returns per dollar spent winning one
NRR
net revenue retention: what last year’s customers pay now ÷ what they paid then

A worked example

Plate 18

A subscription box charges $32 a month at a 45% gross margin, and 6% of subscribers cancel each month. Last quarter it spent $54,000 on marketing and won 1,200 subscribers.

  1. Gross profit per subscriber per month: $32 × 0.45 = $14.40.
  2. Lifetime value: $14.40 ÷ 0.06 = $240, over an average lifetime of 1 ÷ 0.06 ≈ 16.7 months.
  3. Acquisition cost: $54,000 ÷ 1,200 = $45, so LTV:CAC = 240 ÷ 45 = 5.3.
  4. Payback: $45 ÷ $14.40 = 3.1 months.

Each subscriber returns more than five times what it cost to win, and the cost is back in about three months: room to spend more on growth, as long as churn holds as the business scales.

Try it

Monthly figures for one average customer.

$32
45%
6.0%
$45

What a customer is worth

5.3 : 1LTV:CAC
Lifetime value (gross profit)
$240
Payback, ignoring churn
3.1 months
Payback, allowing for churn
3.4 months

Comfortably above 3: each customer returns well over what it costs to win.

The common mistake

Using revenue instead of gross profit

Dividing revenue by churn gives $32 ÷ 0.06 = $533 and an LTV:CAC of 11.9, more than twice the real 5.3. Revenue also pays for the boxes; only gross profit is left to repay the cost of winning the customer.

Remember

  • LTV = monthly gross profit ÷ monthly churn; CAC = acquisition spend ÷ customers won. Aim for an LTV:CAC of 3 or more.
  • Payback = CAC ÷ monthly gross profit. Net revenue retention above 100% means existing customers grow on their own.
  • p = 0.03 means a gap this big would turn up 3% of the time if the versions were the same, not that B is 97% likely to be better. Halving the lift you want to detect quadruples the sample.

Check yourself

Three questions from the Learn room’s bank. Your answers update your mastery of this skill, the same as in Practise.

Use it on real numbers

Open Unit economics, in Marketing › Growth and experiments and try the idea on your own numbers.