The Unit Economics Test
Revenue up 60%. Customer count up 50%. Team morale high. Board pleased.
Dig into unit economics and the picture changes.
The growth trap
Every customer acquired costs more than they’ll ever generate in margin.
This is revenue masking value destruction. Businesses confusing activity with economics.
What to measure
CAC should include everything it takes to acquire a customer. Sales salaries, marketing spend, SDR team, tools, allocated overheads. Not just incremental ad spend.
A business claiming CAC is £3,000 but only counting advertising is lying to itself. Real CAC is often 2-3x the first calculation.
LTV should reflect reality, not aspiration. Businesses assuming 95% gross retention and 110% net retention are forecasting, not measuring.
Pull actual cohort data. What percentage of customers from eighteen months ago still pay today? Those numbers determine LTV. Not the forecast.
Most LTV calculations assume retention rates hold indefinitely. Early adopters retain better than later customers. The first hundred customers loved the product enough to take a risk. Customer one thousand bought because the salesperson discounted heavily.
Their retention behaviour is completely different.
Where the fiction hides
Gross margin matters more than most realise. A SaaS business with 80% gross margins has completely different economics than a services business with 40%. LTV is driven by cumulative margin. Every percentage point of gross margin improvement drops directly to LTV.
Services revenue traps growth businesses repeatedly. They report strong gross margins because they classify services teams as sales and marketing rather than cost of revenue.
The accounting is legal but obscures economics. If you need to hire a services team to deliver what you sold, that’s cost of revenue. Real gross margin is twenty points lower than reported.
Contribution margin often reveals more than gross margin. After dedicated customer success, implementation costs, platform hosting—what margin does each customer actually generate?
A business reporting 75% gross margins might show 45% contribution margins once these costs allocate properly.
Run the test
Monthly. Pull cohort data by acquisition channel and time period. Calculate true CAC including all sales and marketing costs. Measure actual retention, not forecast retention. Know contribution margin by product and customer segment.
Make decisions based on these numbers.
Enterprise sales shows thirty-month payback whilst mid-market shows ten-month payback? Shift resource to mid-market.
A particular channel shows negative unit economics even at maturity? Kill it regardless of pipeline volume.
What to check
Pull last twelve months of customer acquisitions. Segment by channel or sales team. Calculate true CAC, actual retention from older cohorts, contribution margin including all costs.
More than one segment shows LTV below CAC? You’re destroying value.
Payback exceeds eighteen months in your primary channel? Growth is capital-constrained.
Check whether gross margin includes all delivery costs. Services headcount classifies as sales and marketing? Recalculate with it in cost of revenue. Real gross margin might be twenty to thirty points lower.
Test whether retention assumptions hold. Pull cohorts from eighteen to twenty-four months ago. Measure actual retention. Materially below forecast? Your LTV calculation is stale.
The unit economics test reveals whether growth creates value or consumes capital.
Pass it and you grow profitably. Fail it and you grow until the money runs out.
Related: Payback Over Ratios · Profitable and Broke · Reading Guide