Imagine you’re getting ready to invest in a business. You’re excited, maybe even a little nervous. You’ve heard the pitch. The product looks cool. The founders are enthusiastic. But how do you *really* know if it’s a good investment?
Welcome to the world of business profiling for investors. Two key tools in your toolkit? Unit economics and cohort analysis. These sound fancy, but don’t worry. We’ll break them down in a fun and simple way. You’ll be making sharper investment decisions in no time.
What Are Unit Economics?
Let’s start small—literally. Unit economics look at the basics. One unit of a product or service. What does it cost? How much profit does it generate?
Here’s the basic formula you should know:
- Customer Lifetime Value (LTV) – how much money a customer brings in over their whole relationship with the business.
- Customer Acquisition Cost (CAC) – how much it costs to get that customer in the first place.
If LTV is greater than CAC, you’re usually in a good place. Otherwise, it’s a warning sign. Let’s break it down more.
Example Time!
Imagine a subscription box company. They send nerdy gear every month. Customers pay $20/month. On average, customers stay for 10 months. That’s $200 over their lifetime.
Now let’s say it costs the company $50 to get a new customer through ads and promotions. That’s the CAC.
Do the math:
- LTV = $200
- CAC = $50
The LTV:CAC ratio? 4:1. That’s great! Most investors look for a ratio above 3:1. It means for every dollar spent on getting a new customer, they’re earning four back.
But what if the company spends $150 to get that customer? Then it’s 1.3:1. Not awful, but not amazing either. It might even be unsustainable.
What’s the Big Deal?
Unit economics tell you if a business model makes sense at the most basic level. Before you even look at revenue growth or ads or buzz, you want to know: is this scalable?
Think about it like a lemonade stand. If you’re spending $2 to make a cup and selling for $1.50, that’s not going to end well. Even if you sell thousands of cups.
Okay, But What Are Cohorts?
Now we switch gears to another powerful tool—cohort analysis.
A cohort is just a group of customers who started at the same time. It could be people who signed up in January. Or people who made their first order in Q2.
Why does this matter? Because it helps us understand behavior over time.
Cohort Magic
Let’s return to that subscription box company. They might discover:
- January customers stick around for 14 months.
- February customers canceled after 4 months.
What happened? Maybe they changed their marketing approach. Or added a weird product one month. Or maybe February was just… February.
Cohort analysis helps you zoom in and see how changes impact retention and revenue.
So Why Do Investors Care?
You don’t want hockey-stick revenue that crashes a year later. You want to know that new customers are valuable and that existing ones stick around.
Here’s what cohort analysis tells you:
- Retention trends – are customers leaving faster than before?
- Segment performance – which channels or strategies bring the best users?
- Product longevity – is the product actually useful long-term?
When you combine these insights with solid unit economics, you’re on to something powerful.
Putting It All Together
Imagine two companies. Both are making $1 million a year. Here’s what the numbers say:
Company A:
- LTV = $300
- CAC = $100 (LTV:CAC = 3:1)
- High retention in 6-month and 12-month cohorts
Company B:
- LTV = $100
- CAC = $90 (LTV:CAC = 1.1:1)
- Half of customers quit in 3 months
On paper, they look equally successful. But Company A is promising; Company B is leaking value. If you’re an investor, it’s a clear choice.
Fun with Friendly Terms
If you’re still with me, give yourself a high five. You’re learning the secret sauce of startup investing.
Let’s recap in fun words:
- LTV = How much gold one user brings you.
- CAC = How much gold you spend to win that user.
- Unit Economics = Is this shovel worth the digging?
- Cohorts = Group diaries of customer happiness over time.
Red Flags to Watch Out For
There are a few patterns that should make your investor-senses tingle:
- LTV barely more than CAC – There’s no room for error or margin.
- Falling retention across cohorts – Customers come, then vanish.
- Improving one metric but ignoring the other – More users doesn’t help if they walk away fast.
How Founders Can Help
If you’re a founder (hi there!), you can make investors love you by showing:
- Clear and updated unit economics.
- Cohort reports showing retention improvements.
- How changing strategies (ads, features, prices) impact cohorts.
It builds trust. You don’t need to be perfect. You just need to show you understand your numbers and improve over time.
Final Thoughts
Numbers don’t have to be scary. Think of them as the personality traits of your business. Are customers loyal? Are your profits healthy one-by-one?
Unit economics and cohort analysis are like blood tests for your startup. They reveal the deeper story. And as an investor, that story is gold.
So next time you’re sizing up a startup, don’t just look at revenue or downloads. Dive deeper. Look at one customer. Then a group. Then how it evolves over time.
Business profiling just got a lot more fun, don’t you think?