Unit Economics Workbook
Our cohort-based tool for calculating key metrics over time
Like many venture investors, we value evidence of product-market fit and early signs of a path to a repeatable, scalable, and profitable sales model. To that end, we often turn to Unit Economics coupled with Cohort Analysis.
What are Unit Economics?
Unit economics are metrics that reveal the profitability of an average customer over its lifetime – inclusive of all costs to acquire and deliver your service to that customer.
Strong unit economics give investors the confidence that your go-to-market strategy is sound and budgets are well spent. Companies that grow both quickly and efficiently often have vastly superior unit economics.
We tend to focus our attention on two common unit economic measures:
Payback Period – The time it takes to recover (via gross margin) the fully burdened cost of acquiring a new customer.
LTV:CAC – The ratio of an average customer’s expected lifetime value (derived from gross margin and retention rates) to the average fully burdened cost of acquiring a customer.
Reducing the Noise
If there is one constant in high-growth startups, it is change. Consider the following questions:
Is your product gaining new features?
Are you adding new sales team members and methods?
Are you testing new marketing channels and messaging?
Are you are trying new ways to price and package?
Are you adding customers in new verticals and segments?
Are your user and buyer personas growing as they value your product in new (sometimes unexpected) ways?
For high-growth start-ups, the answer is often “Yes,” and this ongoing change can result in a lot of noisy data that can mask or obscure unit economics. Therefore, we also utilize Cohort Analysis to glean a signal from this noise.
What is a Cohort Analysis?
Cohort analysis is a type of analytics where customers are grouped based on their shared traits. These groupings help control for the aforementioned variables.
To conduct cohort analysis, we start by aggregating data based on when a customer was acquired/activated. These groupings should be weekly, monthly, or quarterly – depending on factors like sales cycles, contract length, and natural adoption/usage patterns. We may also further filter the data by product, use-cases, personas, segments, or industry verticals.
Cohorts often reveal if and where a company is improving its product and on-boarding (via retention rates) and its GTM model (via its customer acquisition costs) – the drivers of most unit economic metrics.
Our Downloadable Template
Given that we are constantly analyzing the unit economics of companies – both for new investments and within our portfolio – we have developed a comprehensive Excel workbook to help you easily segment, calculate, and visualize the following metrics:
Cohort-Level Churn and Retention Rates (Logo, Gross Dollar, Net Dollar)
Renewal Rate
Customer Acquisition Cost (CAC)
Payback Period
Lifetime Value (LTV)
LTV:CAC Ratio
Within the workbook, you will also find step-by-step instructions, definitions of key terms/formulas, and links to related resources we have found helpful.
If you have short sales cycles and a few months of sales data, you may be able to start calculating unit economics. However, for products with long sales cycles or multi-year contracts, you may need a couple years of data for the analysis to be meaningful.
Good luck, and if you have suggestions for improving the template, please contact us.
These materials and the information provided herein are (i) for informational and discussion purposes only and are not intended to be, and shall not be regarded or construed as, a recommendation for a transaction or investment or financial, tax, legal, or other advice of any kind, and (ii) subject to various disclaimers and limitations that are set forth in our Terms of Use. By accessing these materials and the information provided herein, you agree to our Terms of Use, including, without limitation, all of the disclaimers and limitations set forth therein.
Last updated: Aug. 2021