Startup and subscription economics
Clear definitions and practical examples to help you understand the numbers and decisions.
Unit economics
Unit economics measures the revenue, variable cost, and contribution associated with one chosen unit, such as an order, subscriber, delivery, or customer. The unit must match the operating model. It shows whether additional volume improves the business before fixed overhead, financing, and investment are considered.
Read the explanationCustomer acquisition cost
Customer acquisition cost, or CAC, is the customer-acquisition spending divided by the number of new customers acquired in the same defined period. Spending can include paid media, sales commissions, agency fees, and acquisition staff when they are genuinely devoted to winning customers. The numerator and denominator must describe the same channel, segment, and acquisition period.
Read the explanationCustomer lifetime value
Customer lifetime value, or LTV, estimates the economic value expected from a customer over the whole relationship. It is not one universal formula. A company may calculate it from revenue, gross profit, contribution after serving costs, or discounted cash contribution, but each version answers a different question. Customer acquisition cost, or CAC, is the sales and marketing spend needed to win a new customer on a stated basis.
Read the explanationLTV-to-CAC ratio
The LTV-to-CAC ratio compares estimated customer lifetime value with customer acquisition cost. It is useful only after both terms are defined. LTV may mean revenue, gross margin, or contribution after direct service costs; CAC may include different sales and marketing costs. A revenue-based LTV divided by CAC is not a profit-based return.
Read the explanationCustomer acquisition payback period
Customer acquisition payback period is the time required for a newly acquired customer’s contribution to recover CAC. Contribution here means revenue less the variable direct costs of serving that customer; it is not revenue and it is not an undefined “gross contribution.” The metric connects growth spending to cash recovery.
Read the explanationAverage revenue per user
Average revenue per user, or ARPU, divides a defined period’s revenue by the average or ending number of active users, using a disclosed convention. It is useful for tracking monetisation per user, pricing changes, usage mix, and the effect of free or discounted users. The denominator must be users, not customer accounts.
Read the explanationAverage revenue per account
Average revenue per account, often called ARPA, divides a defined period’s revenue by customer accounts rather than individual users. It is useful where one account can contain many seats, locations, or users. ARPA and ARPU answer different questions: an account can expand through more users while ARPA changes little, or ARPA can rise through pricing while user count is unchanged.
Read the explanationMonthly recurring revenue
Monthly recurring revenue, or MRR, is the normalised monthly value of active recurring subscription commitments. It is usually built from subscription records, adjusted for recurring upgrades, downgrades, and cancellations. MRR is a run-rate metric: it is not automatically recognised revenue under accounting rules, cash collected, bookings, or the total contract value signed in the month.
Read the explanationAnnual recurring revenue
Annual recurring revenue, or ARR, is generally MRR multiplied by 12, or the annualised value of active recurring subscription commitments. It helps a subscription business compare its recurring run rate across periods. ARR is not automatically recognised revenue, cash collected, bookings, annual contract value, or total contract value. Those measures answer different questions and can move at different times.
Read the explanationAnnual contract value
Annual contract value, or ACV, is the annualised recurring value of a customer contract. It is usually used to compare deal size, segments, sales capacity, and contract mix. The definition must say whether one-time implementation, usage, discounts, and multi-year terms are included.
Read the explanationTotal contract value
Total contract value, or TCV, is the total value committed over a contract’s full stated term, using a defined treatment of recurring and one-time charges. A three-year subscription can have a TCV three times its annual recurring value before fees, but that does not make three years of value available today.
Read the explanationCustomer churn
Customer churn is the share or count of customers from a starting cohort who stop being customers during a defined period. The denominator should be the customers at the start of the period; customers acquired later belong in new-business reporting, not in the retention denominator.
Read the explanationRevenue churn
Revenue churn measures recurring revenue lost from customers or subscriptions that were present at the start of a period. It differs from customer churn because losing one large account can outweigh many smaller customers, and because a retained account can contract without leaving. The definition must state whether it is gross or net of expansion.
Read the explanationCustomer retention
Customer retention is the share of customers from a starting cohort who remain active at the end of a stated period. It is the complement of customer churn when the definitions and cohort match. New customers must be excluded from the numerator, otherwise sales growth can make retention look stronger than it is.
Read the explanationGross revenue retention
Gross revenue retention, or GRR, measures the recurring revenue retained from a starting customer cohort before counting expansion. It subtracts churned and contracted recurring revenue from starting recurring revenue, then divides by starting recurring revenue. It therefore cannot exceed 100% under a consistent definition.
Read the explanationNet revenue retention
Net revenue retention, or NRR, measures how recurring revenue from one starting customer group changes over a period. Begin with that group’s opening monthly recurring revenue (MRR) or annual recurring revenue (ARR). Subtract cancellations and downgrades from those customers, then add their upgrades, extra seats, added products, or other recurring expansion. Exclude customers acquired after the starting date.
Read the explanationExpansion revenue
Expansion revenue is additional recurring revenue from existing customers through upgrades, additional user subscriptions, cross-sell, price increases, or higher committed usage. It should be measured separately from new-customer revenue and from the original recurring revenue being retained.
Read the explanationCohort analysis
Cohort analysis groups customers by a shared starting event, such as acquisition month, plan launch, or first paid subscription, then tracks their behaviour through comparable elapsed periods. It reveals retention, revenue, usage, and payback patterns that a blended company average can hide.
Read the explanationBurn multiple
Burn multiple divides net cash burned over a period by net new ARR created in that same period. It is a capital-efficiency indicator for a growth business: how much cash it consumed to add one unit of annual recurring run rate. The numerator needs a consistent cash definition and the denominator needs a matched ARR movement definition.
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