Title: Unit Economics For Founders — LearnCoachAssist

Q: What is unit economics?
A: The revenue and costs directly attributable to a single unit of value (e.g., one customer, one transaction, one subscription month) used to assess per-unit profitability.

Q: Why do founders obsess over unit economics before growth?
A: Because spending on acquisition before proving a unit is profitable at scale mathematically guarantees greater losses; growth amplifies whatever margin profile already exists.

Q: Define "unit" in unit economics.
A: Any repeatable, countable value-creating entity: a paying customer, a delivered order, an active subscriber per month, or a contract.

Q: What is Customer Acquisition Cost (CAC)?
A: The fully-loaded cost to acquire one new paying customer, including ad spend, sales salaries, tools, and creative, divided by new customers in the period.

Q: What is Customer Lifetime Value (LTV or CLV)?
A: The total gross profit a customer is expected to generate over the entire future relationship with the company.

Q: What is the LTV:CAC ratio?
A: LTV divided by CAC; the canonical measure of per-unit return on acquisition spend. Healthy SaaS startups target ≥ 3:1.

Q: What LTV:CAC ratio signals a struggling business?
A: Below 1:1 means each customer loses money; 1–2:1 is fragile and below investor expectations for venture-scale software.

Q: What is the universally cited "magic number" for LTV:CAC?
A: 3:1 — the standard benchmark for healthy SaaS unit economics.

Q: What is CAC Payback Period?
A: The number of months of gross profit from a new customer required to recover the CAC spent to acquire them.

Q: What CAC payback period do investors consider healthy in SaaS?
A: Under 12 months; best-in-class B2B SaaS achieves under 12, often cited as < 18 months as acceptable.

Q: How is gross margin calculated?
A: (Revenue − COGS) ÷ Revenue, where COGS includes hosting, payment processing, support, and direct delivery costs.

Q: Why is gross margin central to unit economics?
A: Because all per-unit operating costs (R&D, G&A, S&M) must be paid from gross profit; low margin means scale cannot reach profitability.

Q: What gross margin is typical for SaaS?
A: 70–85% once mature; early-stage SaaS often sits 50–70% as hosting and support costs scale with customers.

Q: What gross margin is typical for e-commerce?
A: 20–50% depending on category; thin margins make CAC efficiency existential.

Q: What gross margin is typical for marketplaces?
A: 60–90% take-rate × underlying margin; the marketplace's own gross margin can be very high even if GMV margins are low.

Q: What is Contribution Margin?
A: Revenue minus all variable costs directly tied to producing/serving that unit, expressed per unit or as a percentage.

Q: Contribution margin vs gross margin — which is more useful for unit economics?
A: Contribution margin is more useful for unit economics because it excludes fixed costs and isolates what each incremental unit adds to profit.

Q: What is Burn Multiple?
A: Net burn divided by net new ARR; measures capital efficiency. A burn multiple under 1.0 is excellent, 1.0–1.5 acceptable, > 2.0 inefficient.

Q: Who popularized the Burn Multiple?
A: David Sacks, in a 2020 tweet-thread, framing it as "the SaaS metric that matters most in 2020."

Q: What is Net Revenue Retention (NRR)?
A: Starting ARR from a cohort plus expansion minus churn and contraction, divided by starting ARR; expressed as a %.

Q: What NRR do top-quartile SaaS companies achieve?
A: > 120%; some reach 130–140%+, meaning existing customers grow even as some churn.

Q: What is Gross Revenue Retention (GRR)?
A: Starting ARR minus churn and contraction, divided by starting ARR; excludes upsell. The "floor" of retention health.

Q: What GRR is considered acceptable for SMB SaaS?
A: > 85% annually is acceptable; > 90% is good; enterprise SaaS targets > 95%.

Q: What is logo churn?
A: The percentage of customer accounts that cancel in a period, regardless of contract size; measures customer count loss.

Q: What is revenue churn?
A: The percentage of recurring revenue lost in a period, including downgrades; measures dollar loss.

Q: Why track both logo and revenue churn?
A: Logo churn signals customer dissatisfaction; revenue churn captures financial impact. They can diverge wildly — losing small customers is fine, losing whales is fatal.

Q: What is the difference between gross and net churn?
A: Gross churn is total revenue lost to cancellations and downgrades; net churn subtracts expansion revenue from the same cohort, often producing a negative net churn.

Q: What is negative net churn?
A: When expansion revenue from existing customers exceeds churned revenue, the base grows without new sales — a hallmark of best-in-class SaaS.

Q: What is a cohort?
A: A group of users sharing a defined start event (e.g., customers acquired in January 2025) tracked over time to measure behavior.

Q: Why are cohort analyses central to unit economics?
A: Cohorts isolate acquisition-channel quality and product-market fit; blended metrics hide deteriorating economics masked by newer, better cohorts.

Q: What is a Magic Number in sales efficiency?
A: Sales Magic Number = net new ARR in a quarter ÷ sales & marketing spend in the prior quarter; > 0.75 means invest more in S&M.

Q: What does the Rule of 40 state?
A: A SaaS company's growth rate plus profit margin should exceed 40% (e.g., 30% growth + 10% margin) for a healthy balance of growth and efficiency.

Q: What is the Quick Ratio in SaaS?
A: (New + Expansion MRR) ÷ (Churned + Contraction MRR) in a period; above 4 is excellent, below 2 is weak.

Q: What is ARPU?
A: Average Revenue Per User (or per customer/per account); total revenue divided by customer count, used as a unit-level revenue measure.

Q: How is ARPU used in unit economics?
A: Combined with gross margin and churn, ARPU sets the upper bound on how much you can spend to acquire and retain a customer profitably.

Q: What is the difference between ARPU and ASP?
A: ARPU averages revenue per active user/account over a period; ASP (Average Selling Price) is the mean price of a single transaction or contract.

Q: What is a fully-loaded CAC?
A: CAC that includes the share of marketing, sales, and overhead salaries (not just ad spend) attributable to acquiring one customer.

Q: Why include salaries in CAC?
A: Because ignoring them understates the true cost of acquisition, leading to unprofitable scale even when blended paid-CAC looks healthy.

Q: What is paid CAC vs blended CAC?
A: Paid CAC isolates the cost of a customer from a specific paid channel; blended CAC divides all acquisition spend (including organic-attributed overhead) by all new customers.

Q: What is the LTV formula in its simplest form?
A: LTV = (ARPU × Gross Margin %) ÷ Monthly Churn Rate, for a subscription business with constant ARPU.

Q: How does gross margin affect LTV?
A: LTV typically uses gross profit per period, not revenue, so a 50% gross margin halves the customer's lifetime value vs revenue-based math.

Q: How does churn rate affect LTV?
A: LTV is inversely proportional to churn: doubling churn halves LTV, all else equal. Reducing churn is the highest-leverage unit-economic move.

Q: What is implied valuation from unit economics?
A: A multiple of ARR or revenue (e.g., 10× ARR for SaaS) used to back-solve what LTV:CAC and growth must be to justify a target valuation.

Q: What is the difference between top-of-funnel CAC and paid CAC?
A: Top-of-funnel CAC is spend divided by signups/leads; paid CAC is spend divided by paying customers — these can differ 10–100× and the gap is conversion rate.

Q: What is a fully loaded cost in unit economics?
A: A cost that scales with units sold or customers served, including support, hosting, payment fees, and onboarding labor.

Q: What is a fixed cost?
A: A cost that does not vary with units in the short term (office rent, executive salaries, R&D), paid out of contribution margin.

Q: What is operating leverage?
A: The degree to which a company's profits grow faster than revenue as fixed costs are spread over more units; high gross margin businesses have more leverage.

Q: How do fixed costs affect unit economics?
A: Fixed costs don't change unit economics directly, but high fixed costs mean scale is required to reach per-unit profitability — making low CAC and high LTV existential.

Q: What is the break-even point?
A: The unit volume at which total revenue equals total costs; below this, the business loses money per period; above, it profits.

Q: What is marginal cost?
A: The incremental cost to produce or serve one additional unit; central to pricing and contribution margin.

Q: What is a positive contribution margin?
A: When revenue from a unit exceeds the variable cost to produce/serve it, meaning every additional sale improves total profit.

Q: What is the price elasticity relevant to unit economics?
A: The sensitivity of unit demand to price changes; inelastic demand lets you raise price and grow per-unit profit without losing volume.

Q: What is a price floor?
A: The minimum price at which a unit is still profitable, typically set by variable cost plus desired contribution margin.

Q: What is a take-rate?
A: The percentage of GMV (Gross Merchandise Value) a marketplace retains as revenue; central to marketplace unit economics.

Q: How does take-rate relate to LTV in marketplaces?
A: LTV ≈ take-rate × GMV per user × gross margin on each transaction × customer lifespan; low take-rate must be offset by high frequency or high GMV.

Q: What is GMV?
A: Gross Merchandise Value — the total dollar volume of transactions processed through a marketplace; marketplace revenue is take-rate × GMV.

Q: What is the difference between GMV and revenue?
A: GMV is the total value of goods sold through the platform; revenue is the platform's slice (fees, commissions, ads), not the whole transaction value.

Q: What is the "smile" curve for retention?
A: A cohort retention curve that dips then rises — typical of products with a learning curve, where power users become more engaged over time.

Q: What is the classic retention curve shape?
A: A steep drop in the first weeks, then a long, flat tail; the goal is to make that long tail as high as possible.

Q: What is DAU/MAU?
A: The ratio of Daily Active Users to Monthly Active Users; measures "habit strength" — Facebook famously targets > 50%.

Q: What is activation?
A: The first moment a new user experiences the core value of the product; a key step between signup and retention.

Q: Why is activation critical to unit economics?
A: Because users who never activate have near-zero LTV, so increasing activation rate directly increases effective LTV without spending more on acquisition.

Q: What is the activation rate?
A: The percentage of signups who reach the activation event within a defined window — the first conversion of signup to engaged user.

Q: What is the difference between activation and conversion?
A: Activation is the user experiencing product value (often free); conversion is the user paying — both required for revenue LTV.

Q: What is payback on a per-channel basis?
A: Calculating CAC payback separately for each acquisition channel, so you can reallocate spend from inefficient to efficient channels.

Q: What is channel saturation?
A: The point at which spending more in an acquisition channel yields diminishing returns; the marginal CAC rises above LTV.

Q: What is marginal CAC?
A: The CAC of the next incremental customer, not the average. If marginal CAC > LTV, the channel is exhausted for that audience/creative.

Q: What is the difference between retention and churn?
A: Retention is the percentage of customers who stay over a period; churn is the percentage who leave. They sum to 100% in a closed cohort.

Q: What is annual contract value (ACV)?
A: The annualized revenue from a customer contract, used to normalize multi-year deals for unit economics.

Q: What is a usage-based pricing model?
A: Customers pay per unit of consumption (API calls, GB stored, messages sent); aligns revenue with cost and value delivered.

Q: What is the unit in usage-based pricing?
A: Any countable resource: an API call, a stored gigabyte, a transaction, a generated token. The billable metric.

Q: What is a seat-based pricing model?
A: Customers pay per user/seat with a flat subscription; predictable revenue but misaligned with actual value consumption.

Q: What is the trade-off between seat-based and usage-based pricing?
A: Seat-based = predictable revenue, easy to forecast; usage-based = aligns price with value but revenue is volatile and forecasting is harder.

Q: What is a tiered pricing strategy?
A: Offering 2–4 product packages at distinct price points, typically Free / Pro / Enterprise, to capture different willingness-to-pay segments.

Q: What is the "free" tier's role in unit economics?
A: Free tiers drive top-of-funnel volume for CAC efficiency, but free users carry hosting costs — must be measured as a fully loaded cost, not free.

Q: What is the cost of a free user?
A: Hosting, support, abuse, fraud, and dev time amortized per free user; often $0.10–$5/month depending on product.

Q: What is the difference between revenue and gross profit?
A: Revenue is top-line; gross profit subtracts COGS. Unit economics almost always uses gross profit (contribution margin) per unit.

Q: What is the difference between gross profit and contribution margin?
A: Gross profit subtracts all costs of goods sold; contribution margin subtracts only variable costs tied to that unit. For unit decisions, contribution margin is sharper.

Q: What are variable costs?
A: Costs that scale linearly (or near-linearly) with units produced or sold: hosting, payment processing, transaction fees, per-user support time.

Q: What is a payment processing fee?
A: A variable cost (typically 2.5–3.5%) charged per transaction by Stripe/Adyen etc., which must be included in unit-economics math.

Q: What is a bad LTV:CAC hidden by low churn but high CAC?
A: A scenario where each customer technically pays back (LTV > CAC) but slowly — long payback periods tie up capital and break under interest rates.

Q: What is the difference between payback and LTV:CAC?
A: Payback measures time to recover CAC (a cash-flow question); LTV:CAC is the long-run ratio (a profitability question). Both must be healthy.

Q: What is a "negative churn" SaaS business?
A: A SaaS where expansion MRR from existing customers exceeds churned MRR every month, so net new ARR from the existing book is positive even with zero new sales.

Q: What is expansion revenue?
A: Additional recurring revenue from existing customers via upsells, cross-sells, seat growth, or usage increases.

Q: What is contraction revenue?
A: Revenue lost when existing customers downgrade their plan, reduce seats, or lower usage tier.

Q: What is the difference between gross churn and net churn?
A: Gross churn = total revenue lost to cancels + downgrades; net churn = gross churn minus expansion. Net can be negative.

Q: What is a "leaky bucket" in SaaS?
A: A business with high churn such that new sales barely outpace losses; the bucket never fills regardless of how fast you pour.

Q: What is the "burning platform" unit economics warning?
A: When a business is unprofitable per unit but funds growth with capital; the only path to breakeven is dramatically improving LTV or reducing CAC — both hard.

Q: What is the unit economics of a freemium business?
A: Free users have a cost (hosting) and conversion probability; paid LTV must exceed blended CAC including the cost of the free cohort over its lifespan.

Q: What is the conversion rate from free to paid?
A: The percentage of free users who become paying customers; a small number (1–5% is common) but multiplied by huge free-user volume drives paid growth.

Q: What is the break-even conversion rate?
A: The minimum free-to-paid conversion at which the blended LTV of the free cohort equals the CAC; below this, growth destroys value.

Q: What is the difference between top-down and bottom-up forecasting?
A: Top-down: start with market size and take a share. Bottom-up: multiply channels × conversion × ARPU. Bottom-up is more reliable for unit economics.

Q: What is a sales pipeline coverage ratio?
A: The ratio of open pipeline value to quota; typically 3–4× is required to reliably hit a number.

Q: What is a fully loaded salesperson cost?
A: Total cost of a sales rep (base, commission, benefits, manager, tools, office) divided by customers or ARR they close, used in CAC.

Q: What is ramp time for a new sales rep?
A: The months until a new rep hits full quota productivity; ramped productivity is critical to sustainable CAC math.

Q: What is a ramped vs non-ramped CAC?
A: Non-ramped CAC ignores ramp time and understates cost; ramped CAC amortizes ramp cost over the rep's productive months.

Q: What is the difference between sales-led and product-led growth in CAC?
A: Sales-led = high-touch, high CAC, enterprise ACV; product-led = low-touch, low CAC, SMB ACV. Unit economics differ by an order of magnitude.

Q: What is product-led growth (PLG)?
A: A go-to-market motion where users discover, try, and adopt a product with minimal sales involvement, often via free trial or freemium.

Q: What is the "Land and Expand" model?
A: Land with a small initial contract, then grow usage/footprint inside the account; relies on net negative churn mechanics.

Q: What is the difference between SMB and Enterprise unit economics?
A: Enterprise: high ACV, high CAC, long sales cycle, low churn, multi-year contracts. SMB: low ACV, low CAC, short sales cycle, higher churn %, monthly contracts.

Q: What is a multi-year contract's effect on LTV?
A: Multi-year deals increase LTV proportionally (no churn between years) and dramatically improve LTV:CAC, but introduce collection and credit risk.

Q: What is annual recurring revenue (ARR)?
A: The annualized value of all recurring contracts at a point in time; the canonical top-line metric for SaaS unit economics.

Q: What is monthly recurring revenue (MRR)?
A: The monthly version of ARR: sum of all recurring contracts' monthly value; ARR = MRR × 12.

Q: What is a credit card churn?
A: The rate at which consumer subscription customers cancel by stopping payment; common in B2C, less so in B2B.

Q: What is the difference between voluntary and involuntary churn?
A: Voluntary = customer chooses to leave. Involuntary = payment failure (expired card, insufficient funds). Involuntary can be recovered with dunning.

Q: What is dunning?
A: The process of retrying failed payments and contacting customers to fix billing; can recover 30–50% of involuntary churn.

Q: What is a "zombie" customer?
A: A customer still on the books but with near-zero engagement and at high risk of churning; a drag on support cost and an LTV depressor.

Q: What is expansion ARR?
A: Net new ARR added by existing customers in a period via upsell, cross-sell, or seat increases.

Q: What is a usage curve?
A: A graph of how a customer's usage changes over time; used to forecast expansion and churn risk.

Q: What is a "negative customer" in unit economics?
A: A customer whose fully-loaded cost to serve exceeds their revenue; every additional month they stay deepens the loss.

Q: What is the unit economics of a content/SEO channel?
A: High upfront fixed cost, near-zero marginal CAC per lead, long payback. Great at scale but slow to ramp; suffers if churn is high.

Q: What is the unit economics of paid ads?
A: Low upfront cost, linear with spend, fast feedback, high marginal CAC at scale. Easy to start, easy to overspend.

Q: What is the unit economics of partnerships?
A: Mixed: often high trust → high conversion, but slow to close; partner-sourced deals typically have lower churn and higher ACV.

Q: What is the unit economics of virality?
A: Each user acquisition costs near-zero in cash but is paid for in product experience (friction, incentives); k-factor is the key metric.

Q: What is a k-factor?
A: The number of new users each existing user brings in; k > 1 means viral exponential growth. Rare in B2B, more common in consumer.

Q: What is NPS and how does it relate to retention?
A: Net Promoter Score measures willingness to recommend (0–100); high NPS correlates with low churn, though correlation is noisy at the segment level.

Q: What is a leading indicator of churn?
A: Usage drop, support tickets, NPS decline, payment failures, missing a milestone; lagging indicators (cancellation) are too late to act.

Q: What is customer concentration risk?
A: When a few customers represent a large share of revenue; their churn disproportionately destroys LTV and ARR.

Q: What is revenue concentration limit?
A: A common rule: no single customer > 10% of ARR; an enterprise SaaS audit red flag.

Q: What is the difference between CAC and CRC?
A: CAC = Cost to Acquire a Customer. CRC = Cost to Retain (or Serve) a Customer. Both are fully loaded and both matter for LTV math.