Module 13: Unit Economics - LTV, CAC, & TAM

When valuing disruptive US tech companies or consumer platforms that lack current profitability, analysts discard traditional P/E ratios and evaluate the micro-level Unit Economics. If a company loses money on every individual customer, scaling to a million customers simply scales bankruptcy.

1. Customer Acquisition Cost (CAC)

How much capital must the firm burn in Sales and Marketing to acquire exactly one new paying customer?

• Total Sales & Marketing Expense / Number of New Customers Acquired.

2. Lifetime Value (LTV)

The total gross profit a company expects to extract from a single customer over the entire duration of their relationship.

• Average Revenue Per User (ARPU) * Gross Margin % * Average Customer Lifespan.

3. The LTV:CAC Ratio

This is the ultimate litmus test for venture capital and public SaaS companies.

• LTV:CAC < 1.0: The firm spends $500 to acquire a customer who only generates $300 in lifetime profit. The business model is structurally doomed.
• LTV:CAC > 3.0: The "Gold Standard." The firm generates $3 in lifetime profit for every $1 spent on marketing. Analysts will model explosive future profitability.

4. TAM, SAM, and SOM

To project maximum future revenue, analysts map the market size:

• TAM (Total Addressable Market): The total global demand if the firm captured 100% of the market.
• SAM (Serviceable Available Market): The portion of the TAM that fits the firm's specific product tier or geographic reach.
• SOM (Serviceable Obtainable Market): The realistic fraction of the SAM the firm can actually capture given the current competitive intensity.

Self-Reflection & Assessment

1. Why is an LTV:CAC ratio of 1.0 considered mathematically catastrophic for a business?
2. Differentiate between TAM and SOM when modeling a company's future revenue potential.