Unit economics measures profitability per customer: LTV (Lifetime Value) vs CAC (Customer Acquisition Cost). Healthy: LTV > 3x CAC. Critical for fundraising—proves business can scale profitably. Bad unit economics = burn money forever, can't raise Series A.
Unit economics determines if business model works. Key metrics: CAC (Customer Acquisition Cost) = Total Sales+Marketing Spend ÷ New Customers. Example: ₹30L spend, 100 customers = ₹30K CAC. LTV (Lifetime Value) = ARPU × Gross Margin ÷ Churn Rate. Example: ₹10K/month, 80% margin, 5% churn = ₹10K × 80% ÷ 5% = ₹1.6L LTV. LTV:CAC ratio: 3:1 ideal (₹1.6L LTV, ₹30K CAC = 5.3:1, excellent). 1:1 = losing money per customer (death). <3:1 = tight margins (risky). >5:1 = under-investing in growth (could spend more on CAC). Payback period: Months to recover CAC. Payback = CAC ÷ (Monthly Revenue × Gross Margin). Example: ₹30K CAC, ₹10K/month, 80% margin = 30K ÷ (10K × 80%) = 3.75 months. Target <18 months. Why it matters for fundraising: Series A VCs REQUIRE healthy unit economics. No exceptions. Metrics they check: LTV:CAC >3x, Payback <18 months, Gross margin >60% (SaaS). Fail any = unlikely to raise. Bad unit economics death spiral: Spend ₹1cr on ads → get 1,000 customers @ ₹100K CAC → LTV only ₹60K → lose ₹40K per customer → burn ₹4cr total → can't raise → shut down. Improving unit economics: Increase LTV (reduce churn, upsell/cross-sell, raise prices), Decrease CAC (better targeting, SEO/content vs ads, referrals), Increase gross margin (lower COGS, move upmarket).
LTV:CAC Ratio = LTV ÷ CAC (target >3x). Payback Period = CAC ÷ (MRR × Gross Margin %) (target <18 months). LTV = ARPU ÷ Churn Rate × Gross MarginSaaS: ₹10K CAC, ₹50K LTV (5:1 ratio), 6-month payback. Raised Series A easily at ₹300 crore valuation. Scaled to ₹50 crore ARR profitably.
E-commerce: ₹5K CAC (Facebook ads), ₹3K LTV (high churn, low margins). Lost money on every customer. Raised ₹20 crore, burned through, shut down. VCs funded hoping for "scale"—never came.
Had ₹50K CAC, ₹60K LTV (1.2:1—too tight). Increased prices 30% (LTV → ₹78K), improved onboarding (churn dropped, LTV → ₹90K), optimized ads (CAC → ₹40K). New ratio 2.25:1—acceptable, raised Series A.
Unit economics prove business viability. Good unit economics = can scale profitably (every customer adds profit). Bad = burn money forever (raising rounds to cover losses = unsustainable). VCs say: "Show me unit economics." If LTV<CAC or payback >24 months, won't fund. Fix before fundraising.
3:1 minimum for Series A. 4-5:1 ideal. <3:1 = risky, won't fund. >5:1 = under-spending on growth—could accelerate. Early stage: 2-3:1 acceptable if improving.
Three levers: (1) Increase LTV (reduce churn, raise prices, upsells), (2) Decrease CAC (organic channels, referrals, better targeting), (3) Increase margin (lower COGS, move upmarket). Focus on biggest lever first.
Pre-seed/Seed maybe (team, vision-based). Series A very hard. Series B impossible. Investors fund growth, not perpetual losses. Must prove path to positive unit economics or fundraising fails.
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