Unit economics: the business in one customer
What a business actually is · Investor Foundations Blueprint
A large company is usually one small transaction repeated many times. If the small transaction does not work, scale does not fix it — it just loses money faster.
The four numbers
For most businesses you can get surprisingly far with four:
- What a customer pays, per period or per purchase
- What it costs to serve them, excluding overhead
- How long they stay
- What it cost to acquire them
The first two give you gross margin per customer. Multiply by the third and you have lifetime gross profit. Compare that to the fourth and you know whether growth creates value or consumes it.
An example worth sitting with
A subscription business charges $50 a month. It costs $10 a month to serve the customer, so $40 of gross profit. The average customer stays 30 months, giving $1,200 of lifetime gross profit. Acquiring that customer cost $400.
Three to one. That is a real business, and every marketing dollar is an investment rather than an expense.
Now change one number. Customers stay 10 months instead of 30. Lifetime gross profit falls to $400, exactly what acquisition cost. Every new customer is now a break-even proposition before a single dollar of overhead. Same price, same margin, same marketing — and the business no longer works.
Retention is usually the number that decides whether a growth business is a business. It is also the number companies are vaguest about in public reporting, which should tell you something.
The payback question
The other side of the same coin: how long until a customer repays what they cost to acquire? At $40 a month of gross profit against $400 of acquisition cost, ten months. Under a year is generally healthy. Over two years means the company is financing its own growth for a long time, and needs either patient capital or a lot of confidence in retention.
Where it gets slippery
Companies define these terms to flatter themselves. Watch for lifetime value computed on gross revenue instead of gross profit, acquisition cost that excludes the sales team's salaries, and cohort charts that quietly drop the worst cohort. When the definition is not stated, assume the most generous one and discount accordingly.
Work this through
Take the company from the last lesson and estimate the four numbers. You will not have exact figures — estimate anyway, and write down the basis for each estimate.
Then work out: at your estimates, how long does it take to pay back the cost of acquiring a customer? What would have to be true for that payback to double?
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