Unit Economics

Unit economics examines the profitability of one "unit" of a business, such as a customer, subscription, order or delivery, by comparing the revenue it brings with the costs of acquiring and serving it. If each unit is profitable, scaling up can create profit; if each loses money, scaling only increases losses.

Why it matters

Overall company figures can hide weak foundations, especially during rapid growth or heavy discounting. Unit economics reveal whether the model itself works. Common inputs are customer acquisition cost (CAC), lifetime value (LTV), gross margin, churn and payback period, and a frequently cited rule of thumb is that LTV should be a multiple of CAC, often quoted as around three. Thresholds depend on the business.

Example

Subscription at 20 per month, gross margin 80%
Gross profit per month: 16
Average customer stays 24 months -> LTV = 16 x 24 = 384
CAC = 120
LTV / CAC = 3.2
Payback = 120 / 16 = 7.5 months

Common mistakes

• Using revenue instead of margin when calculating LTV.
• Leaving out sales salaries or onboarding cost from CAC.
• Using averages that hide the difference between segments.

Related

• CAC
• LTV
• Gross margin
• Churn rate

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