Learning objectives
By the end you can:
- Choose the correct unit of analysis for any business using the three tests (it repeats; it carries a full revenue-and-cost loop; it matches how growth capital is actually spent), whether that unit is a store, a subscriber, an order, a policy, a seat-hour or a loan, and run the two-layer split (flow unit for contribution, stock unit for capital and CAC) where one unit is not enough.
- Compute contribution margin properly as price minus all costs that vary with the unit, classified by behavior rather than by P&L caption, then build the CM1/CM2/CM3 ladder for an e-commerce business from raw data, reading each company's own ladder definition from its disclosures before comparing anything.
- Compute CAC three ways (paid, blended, fully-loaded), decompose it by channel, and explain why blended CAC is a mix statement that flatters a company exactly when it is scaling paid acquisition.
- Work the churn algebra: logo vs revenue churn, monthly↔annual conversion (compounding, not ×12), churn-derived expected lifetime (
1/churn) with its geometric assumption stated, and GRR vs NRR as the gross/net retention pair (previewing the full NRR treatment in Phase 5). - Compute LTV honestly: margin-based, churn-derived, and discounted (
LTV = m·r/(1 + d − r)). Quantify how much the undiscounted, revenue-based version overstates, and name every lever in the LTV/CAC abuse catalogue. - Compute CAC payback in months as the cash-reality metric, place it against archetype thresholds, and connect payback × growth rate to cash burn and financing dependence.
- Build and read a cohort retention triangle: rows as maturation curves, columns as vintage quality, diagonals as calendar shocks; then demonstrate with numbers how growing blended totals can mask decaying cohorts.
- Build two complete unit P&Ls end-to-end, one store (DMart-style, through capex, maturation, and payback) and one subscriber (SaaS/OTT-style, through CAC, LTV, and payback). Compute break-even units and utilization thresholds, and run the reconciliation test (units × unit P&L + corporate ≈ reported P&L) to catch allocation games.
Prerequisites & connections
Builds on. M4.01 for the archetype taxonomy (each archetype implies its natural unit), the revenue→FCF waterfall (the unit P&L is that waterfall miniaturized), contribution margin and DOL (§4.12 there; formalized per-unit here), and the GMV/net-revenue discipline. M2.01–M2.03 for margin structure, DuPont, and ROIC: a store payback calculation is ROIC computed one store at a time. M2.04–M2.05 for cash conversion and working capital, because a unit has a balance sheet, not just a P&L. M3.01 for TVM: the discounted LTV formula is the growing-perpetuity/annuity algebra applied to a customer; if LTV = m·r/(1+d−r) looks alien, rederive it from the geometric series before proceeding. M3.05 for reverse DCF, where "what does the price imply?" becomes, for money-losing consumer-tech, "what unit economics does the price imply?" M1.06 for revenue recognition: whether a discount is contra-revenue or a marketing expense (consideration payable to a customer, Ind AS 115/ASC 606) decides where it sits in the CM ladder, and companies exploit this.
Feeds forward. In M4.03, industry structure determines whether good unit economics survive contact with competition. In M4.04–M4.06, a moat is, mechanically, the thing that stops unit economics from mean-reverting; you cannot grade what you cannot compute. In Phase 5, every sector playbook is this plus sector physics: SaaS (NRR, magic number), retail (GMROI, sales/sq ft), banks (NIM − credit cost per rupee of assets), insurance (VNB per policy, combined ratio), hotels/airlines (occupancy and load-factor breakevens, the utilization math of §4.12). In Phase 8, teardown question 4 ("the unit economics: smallest repeatable unit, contribution, CAC/LTV, payback") is this material executed in ten minutes. Competency C3 is certified partly on the skills built here.
The one-sentence version. Find the smallest thing the company does over and over, compute what one more of it truly earns after every cost that comes with it (acquisition included, discounting included), check the claim against cohorts rather than averages, reconcile the unit story back to the reported P&L, and only then decide whether growth is a promise or a threat.