Unit Economics for Sustainable Growth
The 3x CAC rule: if your LTV > 3x CAC, you can scale sustainably. Here's how to build, measure, and improve unit economics over time.
You can grow fast with broken unit economics—as long as you have capital. But sustainable growth requires the opposite: unit economics where each customer pays you enough to fund acquisition of the next one.
This is what separates durable companies from venture-backed zombies that need capital to survive.
The Benchmark
LTV > 3x CAC is the gold standard. Payback period < 12 months is sustainable. NRR > 110% (SaaS) shows you're building value, not churning customers.
Understanding the 3x CAC Rule
Why 3x? Because profit margins exist. Here's the math:
Assume: Customer pays $100/year (LTV = $100)
CAC = $30 (30% of LTV)
Gross margin = 70% (cost of delivering service)
Revenue per customer: $100
Less: COGS (30%): -$30
Less: CAC (30%): -$30
Operating profit per customer: $40 (40% margin)
This $40 covers: R&D, sales team, customer success, admin, taxes, reinvestment.
Now flip it: if CAC is $100 and LTV is $100 (1x rule):
Revenue: $100
COGS (30%): -$30
CAC (100%): -$100
Operating profit: -$30 (losing money)
You need to acquire 100 customers to cover company operations. You can't scale this way unless you have unlimited capital.
The 3x Rule Works
At 3x CAC, you have enough margin to cover operations and still grow. That's why it's the industry benchmark.
How to Measure Unit Economics Accurately
The key: cohort analysis. Don't average across all customers—analyze by cohort (acquisition cohort).
Cohort 1: Jan 2024
This cohort of 100 customers acquired in January. Cost $2K to acquire. Generated $50K total LTV. 25x ROI.
Cohort 2: Feb 2024
This cohort of 120 customers acquired in February. Cost $2.5K to acquire. Generated $48K LTV. 19x ROI.
Cohort 3: Mar 2024
This cohort of 80 customers acquired in March. Cost $3K to acquire. Generated $35K LTV. 12x ROI.
The Trend
CAC is rising, LTV is stable or declining. This is a red flag. Investigate why cohort quality is degrading.
By cohort, you see trends. Average metrics hide them. Maybe your Jan cohort is great but your recent cohorts are terrible (you're acquiring at higher CAC and getting lower LTV).
Payback Period: The Speed Metric
LTV > 3x CAC is necessary but not sufficient. You also need fast payback.
Fast Payback (<6 months)
You spend $100 on customer acquisition. They pay you back in 6 months. The other 6 months is pure profit. This is exceptional and lets you grow fast with limited capital.
Normal Payback (6-12 months)
Spend $100, they pay back in 9 months. You need capital to weather the 9-month gap. Sustainable but not exceptional.
Slow Payback (>12 months)
Spend $100, they pay back in 18 months. You need significant capital to fund the gap. You can't grow fast unless you raise more money.
For SaaS businesses, 6-9 month payback is good. For e-commerce or marketplace, 3-6 months. For enterprise sales, 12+ months is normal.
Net Revenue Retention: The Growth Multiplier
NRR > 110% means you're expanding revenue with existing customers (upsells, cross-sells) faster than you're losing them (churn).
This is the secret weapon of sustainable growth. If you have 120% NRR and 20% new customer acquisition, your growth compounds.
Example
Your existing book grows 20%, plus you add 20% new. You get 40% total growth without crazy CAC spending.
Need Help Building Unit Economics?
Eagle Rock CFO helps you model, measure, and improve unit economics so your company can scale sustainably.
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