Unit Economics Turnaround
You're spending $5 to acquire customers worth $3. The only way to grow is to bleed cash faster. This is broken unit economics. Here's how to fix it.
You're scaling. Acquiring customers. Growing revenue. But every dollar of revenue requires you to spend $1.20 to acquire it. No amount of cost cutting fixes this—the business model is broken.
This is the situation many founders ignore until their investors start asking hard questions: "At what point does this business become profitable?" Answer: never, with current unit economics.
The Math
If LTV (lifetime value) < 3x CAC (customer acquisition cost), your unit economics are weak. If LTV < CAC, you have a death spiral.
Diagnose Your Unit Economics Problem
Not all unit economics problems are the same. Identify which type you have:
Problem 1: High CAC
Symptoms: Spending heavily to acquire customers but payback is 12+ months
Root causes: Expensive sales process, paid marketing is inefficient, market is saturated
Fix options: Shift to cheaper channels (inbound, product-led growth, partnerships), optimize marketing spend, raise prices to justify higher CAC
Problem 2: Low LTV
Symptoms: Customers don't stay long (high churn) or don't spend much
Root causes: Product doesn't solve real problem, competitive options available, pricing too low, customer misfit
Fix options: Improve product, increase retention, raise prices, focus on higher-value customers
Problem 3: Both (The Worst)
Symptoms: High CAC + high churn + low AOV = death spiral
Root cause: Wrong market, wrong product, wrong go-to-market
Fix option: Likely requires pivot or focused segment
The Five Levers to Fix Unit Economics
You have limited levers. Pull them in order of ease (and impact):
Raise Prices
Easiest. Most founders underprice dramatically. Raising prices 20-30% can cut CAC payback from 12 months to 9 months.
Reality check: If customers will leave at higher prices, your LTV problem is real—the product isn't valuable enough. Fix that first.
Improve Retention
Every 10% improvement in annual churn can double your LTV. Invest in onboarding, customer success, feature improvements that lock in customers.
Typical wins: Better onboarding (5-10% churn reduction), upsell features (10-20% LTV increase), focus on high-value segments
Shift Customer Mix
Not all customers are equal. Stop acquiring low-value customers. Focus on segments with better LTV:CAC ratio.
Example: Your marketplace is losing $2 per customer from individual sellers, but making $8 per customer from businesses. Stop targeting individuals.
Lower CAC
Harder than raising prices. Options: shift to product-led growth, improve sales efficiency, find cheaper channels, build partnerships
Reality: If your product is compelling, inbound and referral channels should work. If they don't, the problem is product-market fit, not marketing.
Pivot or Segment
If all four levers don't work, you might have the wrong market or wrong product. Focus on the segment where you have best unit economics.
Example: Generic project management tool has terrible unit economics. But for architecture teams, it works. Become category-specific.
Timeline for Fixing Unit Economics
Don't expect instant results. Here's realistic timing:
Pricing Changes: 2-4 weeks
Implement immediately, but impact takes time (customers churn at different rates, new cohorts on new pricing gradually mix in). Full impact: 3-4 months.
Retention Improvements: 3-6 months
Better onboarding takes time to show results. You're fighting against existing churn for 2-3 months before you see improvements.
CAC Reduction: 2-3 months
Shift to product-led growth or new channels, results appear as you close the first cohort (30-90 days depending on sales cycle).
Pivot: 3-6 months (minimum)
If you need to pivot to a new segment or market, expect 3-6 months before you have data on whether it works.
Act Now, See Results Later
If your unit economics are broken, you don't have 6 months of experimentation. Make quick bets on what might work, measure ruthlessly, and kill what doesn't work in 4-6 weeks.
When You CAN'T Fix Unit Economics
Sometimes, unit economics simply don't work for a business model. Know when to stop trying:
Model Problem 1: Core Margin Structure is Broken
You sell software at $100/mo but it costs you $80/mo to deliver. No amount of CAC optimization fixes a 20% gross margin business. Raise prices or change the model.
Model Problem 2: Market is Too Competitive
You're competing with enterprise vendors for the same customer. They will outbid you on customer acquisition. Either specialize (become 10x better for a subset) or pivot.
Model Problem 3: Cohort Economics Don't Improve
You've raised prices, improved retention, shifted to better customers. Unit economics still don't work. The product doesn't deliver enough value. Consider exit, pivot, or shutdown.
Be Honest Early
If you can't get unit economics to work in 4-6 months of trying, the issue is likely fundamental (wrong market, wrong product). Better to pivot early than to spend 2 years chasing a dead-end.
Unit Economics Mistakes
1. Ignoring the Problem
Founders notice broken unit economics but think "if we just grow faster, it will work." It won't. Deal with it now.
2. Raising Prices Without Proof
You raise prices and 30% of customers leave. You made retention worse, not better. Test pricing on new customers first.
3. Not Cohort-Analyzing
You think you've improved retention, but you're only looking at average churn. Cohort analysis shows you: each cohort is churning faster than the one before. You're worse, not better.
4. Lowering CAC by Abandoning Sales
You get inbound interest, but no sales team to close. You lose deals. Or you cut marketing and organic lead flow dries up. Lower CAC, but also lower revenue.
5. Focusing on The Wrong Lever
Your problem is LTV (product-market fit issue). You spend 6 months optimizing CAC. Wrong lever. If LTV problem, fix the product first.
Need Help Fixing Your Unit Economics?
Eagle Rock CFO helps founders diagnose unit economics problems and execute fixes. We'll help you prioritize levers and measure impact.
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