Growth Accounting and Advanced Unit Economics: Breaking Down Your Growth
Master growth accounting. Decompose your growth into components (new customers, expansion, churn), understand unit economics deeply, and identify growth levers.
Key Takeaways
- Growth accounting equation: MRR(t) = MRR(t-1) + New MRR - Churn MRR + Expansion MRR. Example: £100K starting → +£20K new customers - £2K churn + £3K expansion = £121K (21% growth). Insights: Where is growth coming from? New customers (acquisition), expansion (NRR), or both? Example: Growth 30% but all from new customers (no expansion) = fragile (churn hits hard). Better: Mixed (new + expansion) = sustainable.
- Unit economics pyramid: (1) Acquisition (CAC), (2) Retention (churn, LTV), (3) Monetization (ARPU, ACV). Deep metrics: Payback period = CAC / monthly gross profit per customer (target <12 months). CAC Ratio = Revenue year 1 / CAC (target >5x). Magic Number = (Revenue this quarter - Revenue last quarter) × 4 / Sales & Marketing spend previous quarter (target >0.75). Example: Q1 £100K, Q2 £120K, S&M spend Q1 £30K → Magic = (20K) × 4 / 30K = 2.67 (excellent).
- Cohort-level unit economics: Analyze by acquisition cohort (Jan, Feb, Mar, etc). Metrics: MRR per cohort over time, retention %, expansion rate. Example: Jan cohort 100 customers → Dec (12 months later) £8K MRR. Compare to Feb cohort £7.5K MRR (worse, investigate). This reveals: Product improvements working, pricing changes working, or acquisition quality declining.
Growth Accounting Decomposition
Breaking down where your growth comes from. **The Growth Accounting Equation** MRR(t) = MRR(t-1) + New MRR - Churn MRR + Expansion MRR Where: - MRR(t-1): Last month's revenue - New MRR: Revenue from new customers - Churn MRR: Revenue lost from churned customers - Expansion MRR: Revenue growth from existing customers Example month-by-month: | Metric | Jan | Feb | Change | |--------|-----|-----|--------| | Starting MRR | £100K | £121K | - | | New customers | 20 × £1K | 20 × £1K | +£20K | | Churn MRR | 2% × £100K | 2% × £121K | -£2K /-£2.4K | | Expansion MRR | 5% × £100K | 5% × £121K | +£5K / +£6.05K | | Ending MRR | £121K | £147.65K | +21% / +22% | **Growth Source Analysis** Decompose growth into components: Growth = 21% / 22% - New customer contribution: 20% (new MRR / starting) - Expansion contribution: 5% - Churn impact: -2% - Net: 20% + 5% - 2% = 23% (rounding difference) Insight: - New customers = 87% of growth - Expansion = 21% of growth - Churn = drag (13%) Strategic implication: Growth heavily dependent on acquisition (risky). If acquisition slows, growth drops fast. **Sustainable Growth** Growth sources matter for sustainability: Scenario A (Acquisition-heavy): - New customers: +30% growth - Expansion: +0% (no upsells) - Churn: -5% (natural attrition) - Net: 25% (fragile if acquisition stops) Scenario B (Balanced): - New customers: +15% growth - Expansion: +10% (NRR >100%) - Churn: -3% (good retention) - Net: 22% (more durable) Better: Scenario B. More resilient to acquisition fluctuations. **Metrics to Track by Month** | Month | MRR | % Growth | New % | Expansion % | Churn % | |-------|-----|---------|-------|------------|---------| | Jan | £100K | - | - | - | - | | Feb | £121K | 21% | 20% | 5% | -2% | | Mar | £143K | 18% | 18% | 4% | -2% | | Apr | £165K | 15% | 17% | 4% | -3% | Insight: Growth decelerating (21% → 15%) while new customer acquisition stable. Reason: Churn increasing, expansion stable. Action: Focus on retention.
Advanced Unit Economics
Deep metrics for understanding profitability. **The Unit Economics Pyramid** Foundation: Acquisition CAC (Customer Acquisition Cost): - Total sales & marketing / new customers acquired - Example: £200K budget / 50 customers = £4K CAC - Healthy: CAC < ⅓ LTV (payback in 3-4 months) Second level: Retention Churn rate (monthly): - % customers lost per month - Example: 2% monthly - Healthy: <2% for SMB NRR (Net Revenue Retention): - Expansion revenue growth + retention - Formula: (Starting MRR + Expansion - Churn) / Starting MRR - Example: £100K start, £5K expansion, -£2K churn = 103% NRR - Healthy: 100%+ (zero net churn or growth) Third level: Monetization ARPU (Average Revenue Per User): - Total revenue / active customers - Example: £100K / 100 = £1K ARPU - Healthy: Growing over time (price increases, expansion) **Payback Period** How long until a customer pays for their acquisition cost. Formula: CAC / (Monthly Gross Profit per Customer) Where Monthly Gross Profit = ARPU × Gross Margin % Example: - CAC: £4K - ARPU: £1K - Gross margin: 80% - Monthly gross profit: £1K × 80% = £800 - Payback: £4K / £800 = 5 months Interpretation: - 5 months payback = good (recover CAC quickly) - 12 months payback = risky (long time to profitability) - 3 months payback = excellent (aggressive expansion justified) **CAC Payback Ratio** CAC Payback = Total Revenue Year 1 / CAC Example: - CAC: £4K - Year 1 revenue: £12K (£1K ARPU × 12 months) - CAC Payback: £12K / £4K = 3x Interpretation: - 3x: Good (year 1 revenue covers CAC 3x) - 5x: Excellent (very profitable) - 1.5x: Poor (barely recover CAC in year 1) Target: 5x or higher for growth stage. **Magic Number (Growth Efficiency)** How efficiently company converts S&M spending to revenue growth. Formula: (Revenue Q(t) - Revenue Q(t-1)) × 4 / Sales & Marketing Spend Q(t-1) Where ×4 annualizes the quarterly number. Example: - Q1 revenue: £100K - Q2 revenue: £120K - Q1 S&M spend: £30K - Magic number: (£20K) × 4 / £30K = 2.67 Interpretation: - >0.75: Healthy growth efficiency - 1.0+: Excellent - 2.0+: Outstanding - <0.5: Inefficient (scale back spending or improve conversion)
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Start for free →Cohort-Level Unit Economics
Understanding customer economics by acquisition cohort. **Cohort Analysis Framework** Cohort: Group of customers acquired in same month. Example: January 2024 cohort (50 customers, avg £1K ACV) Month 0 (Jan): 50 customers × £1K = £50K MRR Month 1 (Feb): 49 customers × £1K + expansions = £49.5K Month 2 (Mar): 48 customers × £1.02K (10% expansion rate) = £48.96K Month 3 (Apr): 47 customers × £1.04K = £48.88K MRR evolution for Jan cohort over 12 months: | Month | Customers | ARPU | MRR | Growth | |-------|-----------|------|-----|--------| | 0 | 50 | £1.00K | £50K | - | | 3 | 47 | £1.04K | £48.9K | -2% | | 6 | 46 | £1.08K | £49.7K | -1% (expansion recovered) | | 12 | 44 | £1.14K | £50.2K | +0.4% (durable!) | Insight: Jan cohort MRR stable over 12 months despite 2% churn. Expansion offsets churn (healthy). **Comparing Cohorts** Compare different cohort acquisition months: | Jan Cohort | Feb Cohort | Mar Cohort | Apr Cohort | Metric | |---|---|---|---|---| | £50K (month 0) | £52K | £51K | £49K | Starting MRR | | £50.2K (month 12) | £51.8K | £50.4K | £47.5K | 12-month MRR | | 0.4% | -0.4% | -1.2% | -3% | 12-month growth | Insight: - Jan, Feb cohorts stable/growing (product working well) - Mar cohort declining 1.2% (investigate) - Apr cohort declining 3% (major issue) Hypothesis for Apr decline: - Onboarding change (worse) → lower expansion - Pricing change (higher) → more churn - Product regression → churn increase - Market change → SMB customers less likely to expand Action: Investigate Apr cohort churn/expansion drivers. **Cohort Economics Table** Detailed unit economics by cohort: | Cohort | CAC | LTV | LTV/CAC | Payback | Status | |--------|-----|-----|---------|---------|--------| | Jan | £4K | £60K | 15x | 4 mo | Good | | Feb | £4.2K | £60K | 14.3x | 4.2 mo | Good | | Mar | £4K | £55K | 13.75x | 4.3 mo | Fair | | Apr | £3.8K | £48K | 12.6x | 4.8 mo | Poor | Insight: - Apr cohort: Lower CAC (cheaper acquisition) but much lower LTV (poor quality) - Maybe cheaper channel attracted wrong customers - Action: Adjust acquisition strategy (higher CAC but better quality) **Retention Curves** Visualize retention by cohort: Jan cohort: 100% → 98% (month 1) → 96% (month 3) → 94% (month 6) → 90% (month 12) Feb cohort: 100% → 98% → 95% → 92% → 88% Mar cohort: 100% → 96% → 92% → 88% → 82% Apr cohort: 100% → 94% → 88% → 80% → 70% Insight: Apr cohort retention much worse. Early red flag (month 1 already 6% churn vs 2% for Jan). Action: Investigate onboarding, product, pricing for Apr cohort issue.
Optimizing Unit Economics
Improving profitability and growth. **Levers to Improve Unit Economics** Lever 1: Reduce CAC Method 1: Improve conversion (same spend, more customers) - Current: £200K spend → 50 customers = £4K CAC - Improve conversion 20% → 60 customers = £3.3K CAC - Savings: £0.7K per customer × 50 = £35K/year Method 2: Lower CAC channel (cheaper but same quality) - Shift from paid ads (£4K CAC) to self-serve (£2K CAC) - Savings: £2K per customer × 50 = £100K/year Lever 2: Increase LTV Method 1: Reduce churn - Current: 2% churn → £5K LTV - Improve to 1% churn → £10K LTV - Improvement: +100% LTV Method 2: Increase ARPU (price or expansion) - Current: £1K ARPU - Increase to £1.2K (price increase + expansion) - Impact: +20% ARPU = +20% LTV Method 3: Extend customer lifetime - Better onboarding → longer time to value → lower early churn - Cost: £5K onboarding program - Benefit: 1% early churn reduction → £150K+ LTV improvement - ROI: 30x **CAC Payback Optimization** Current: 5 month payback Option A: Reduce CAC - CAC: £4K → £3K (20% reduction) - Payback: 5 months → 3.75 months - Benefit: Recover investment faster, can reinvest sooner Option B: Increase gross margin - Gross margin: 80% → 85% (reduce COGS) - Monthly gross profit: £800 → £850 - Payback: 5 months → 4.7 months - Modest improvement Option C: Increase ARPU - ARPU: £1K → £1.2K - Monthly gross profit: £800 → £960 - Payback: 5 months → 4.2 months - Better than margin improvement Best combo: Reduce CAC 10% + increase ARPU 10% + improve margin 2% = significant payback acceleration. **Magic Number Improvement** Current: Magic Number 0.75 (just healthy, want 1.0+) Method 1: Improve sales efficiency (revenue growth per S&M $) - Increase conversion: 5% → 7% = 40% more customers - Same spend → more revenue - Magic number 0.75 → 1.05 Method 2: Reduce S&M spend (same revenue with less spend) - Revenue growth: 20% (unchanged) - S&M spend: £30K → £20K - Magic number 0.75 → 1.33 (excellent) Better: Combination - Improve conversion 20% (more revenue) - Optimize S&M spend 15% (less spend) - Net: Magic number 0.75 → 1.38