A crash course in unit economics — don’t learn this the painful way

As VCs stop funding money-losing businesses, healthy unit economics matter more than ever

Ha Nguyen
Spero Ventures


After leaving my role as VP Product at Stella & Dot in 2013, I was excited to join a new mission-driven startup that was seeing explosive growth. The startup was Keaton Row, a tech-enabled personal styling platform where personal stylists could create digital lookbooks of wardrobe selections for their clients through a drag & drop interface.

After multiple discussions with the founders, my excitement kept building. Customers were spending $1,400 per year on average with Keaton Row, they were seeing double digit growth month-over-month, and they had a sky-high Net Promoter Score (NPS). High spend, super-charged growth, and customer love — it seemed like a recipe for the next unicorn!

Well, not so fast.

Even though I was looking at some of the right metrics, I didn’t yet have the VC mentality that I have today. Because of that, I didn’t drill into all the right details, and I missed something really important.

It turned out that even though the founders were completely truthful about their numbers, the business picture wasn’t quite as rosy as I thought it was. Ultimately, I learned the cold hard truth about unit economics. Despite high customer lifetime revenue, Keaton Row was losing money on each customer. It’s difficult to become a healthy, profitable business when your unit economics are upside down.

“Nothing can give a startup the illusion of success like negative unit economics. This occurs when a startup is selling a product for less than its variable cost. Hypergrowth is easy when you’re selling dollar bills for 90 cents.” — David Sacks, Craft Ventures

Despite my MBA and all my previous experience, I failed to see that Keaton Row was falling victim to this illusion of success. I’m much savvier now — which is why I’m writing this piece, so that others can learn this lesson about unit economics less painfully. I hope it serves as a guide for employees to ask the right set of questions before joining any startup. I also hope it helps educate founders about starting and building healthy, right-side-up businesses.

What are unit economics?

The unit

Unit economics is the measure of the profitability of one unit of your product or service.

To calculate unit economics, first determine the “unit” you’re looking to measure. For a B2C company, you may wish to measure the profitability of a good/service, an order, or a customer. For a B2B company, you may wish to measure the profitability of a customer or even the efficiency of a sales rep.

For Keaton Row, we started by measuring the profitability of each order. The truth was that for each customer spending $350 on an order, our net revenue was just $50. We only pocketed ~14% affiliate revenue through our retailer partnerships on these orders. Once you factored in the per-unit labor of $60 (i.e. the cost of the Stylist’s time to create the lookbook and service each order), the unit economics came out to be negative.

After weighing various options to make each order profitable, we made the decision to move away from revenue generation through affiliate revenue to revenue generation by becoming the retailer. This meant holding inventory, merchandising and selling, providing customer service, and handling returns (a whopping 60%!). In the end, this model left us with a net profit of $60 for each order — better than negative, but still not great.

Lifetime Value (LTV)

Now that our unit economics were right-side up, we needed to understand the profitability of acquiring each customer — the customer was now the next logical “unit” in the unit economics consideration. Start by calculating the lifetime value (LTV) of each customer. I quickly learned that lifetime value does NOT equal lifetime revenue. Instead LTV is a prediction of the total net profit attributed to that customer over her lifetime with your product.

While it’s true that many customers bought from Keaton Row 4x a year, this didn’t reflect customer churn, as some customers bought only 1 or 2 more times, and others never bought after their initial purchase. Factoring in the contribution margin of each order and historical customer churn, LTV was calculated to be ~$110 (net profits) over the lifetime of our typical Keaton Row customer.

These days as an investor, I see a lot of pitch decks incorrectly labeling LTV as lifetime revenue versus actual value (which is net profit). Don’t make this mistake!

Lifetime Value (LTV) vs. Customer Acquisition Cost (CAC)

Once we understood the profitability of our customer over the course of her lifetime with Keaton Row, our next challenge was to figure out if we could acquire her cost-effectively so that the value (profits) generated over her lifetime exceeded the cost of acquiring her.

We found that some marketing channels were profitable for us (LTV>CAC), and others were not. Of the profitable channels, we found that they were only profitable at a certain volume of customers, and eventually that channel became saturated. Once the “low-hanging fruit” customers were acquired at cheap CAC, the customers in the next tier were much more expensive to acquire — even within the same marketing channel. So, it was an endless race to look for the next set of marketing channels to cost-effectively acquire customers. Our Spero Ventures EIR, Sonny Mayugba, calls this strategy “find the wells and drill them dry.”

Eventually, we moved away from measuring blended CAC & LTV across all channels to attribution and measurement of CAC & LTV by channel to help us understand the true profitability of each channel.

Looking at blended CAC & LTV is not enough. As an investor, don’t be surprised if I ask you to break this down for each of your marketing channels.

Customer Payback

A standard marketing rule is that you want a ratio of 3:1 LTV to CAC. That is, for every $100 spent to acquire a customer, you want the customer to generate $300 in net profit over the course of her lifetime. If the frequency between purchases is long, you may be spending too much cash upfront to acquire that customer before she ultimately pays back over the course of her lifetime.

Since Keaton Row customers typically only bought once a quarter (during seasonal wardrobe refreshes), it made a lot of sense for us to start calculating our payback period for acquiring them. Ideally, we wanted the marketing spend on each customer to pay back within 6 months. Otherwise, we’d be able to grow, but we’d burn through venture capital funding too quickly just through marketing spend alone. We didn’t want to go back out and fundraise again before we were truly ready.

If customer payback >6 months, you may be burning through venture capital funding too quickly.

Vigilance is rising

Now that I’m a venture capitalist, I coach founders to pay attention to their unit economics early. Otherwise, the truth about your profitability is going to come out, which will impact you in negative ways. For example:

The truth is going to come out when growth investors and public market investors dig into your #’s. Top-line growth achieved at the expense of poor unit economics will get sussed out quickly.

BlueApron and WeWork got punished by the capital markets because of negative unit economics.

The truth is going to come out when VC funding dries up. We’ve been living in a frothy funding environment over the last 10 years. As capital dries up during these uncertain times, startups that have poor unit economics will have a hard time raising their next round of VC funding. In the vast majority of cases, these startups may not be able to make it to the other side of this downturn.

The truth is going to come out internally. When you have upside-down unit economics and can’t grow profitably, it will be difficult to attract and retain the best people. This is why I eventually decided to leave Keaton Row.

Does your startup have a bright future?

In these uncertain economic times, the stakes become even higher. Healthy unit economics matter more than ever as investors stop funding money-losing businesses. Startups that have healthy unit economics, and can grow based on profits, will be the ones that attract today’s VC dollars, because they have the strongest chances of making it to the other side.

If you’re a founder who is building the things that make life worth living with strong, healthy unit economics and are looking to fundraise, I hope you’ll reach out: ha@spero.vc

A special shout out to my friend Trey Pruitt, CFO consultant & CEO of Banner Peak Group, who gave me a master class in unit economics while I was at Keaton Row!



Ha Nguyen
Spero Ventures

Ha is currently a Partner at Spero Ventures, an early stage venture capital firm investing in the things that make life worth living.