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Unit Economics
The analysis of revenue and costs at the individual customer or transaction level, determining whether each customer is profitable.
Formula
Core unit economics metrics:
LTV = (ARPU × Gross Margin) ÷ Churn Rate
LTV:CAC Ratio = LTV ÷ CAC
CAC Payback = CAC ÷ (Monthly Revenue × Gross Margin)
Definition
What are Unit Economics?
Unit economics measure the profitability of your business at the individual customer or transaction level. The core question: do you make money on each customer, and how much?
If your unit economics are negative, you lose money on every customer. No amount of growth will fix that. If they're positive and strong, growth creates compounding value.
Why Unit Economics Matter
Unit economics determine whether your business model works. A company with poor unit economics is running on a treadmill, growing without building value. A company with strong unit economics creates value with every new customer.
Investors obsess over unit economics because they reveal business quality. Great unit economics justify investment in growth. Poor unit economics need fixing before scaling.
Key Unit Economics Metrics
Customer Acquisition Cost (CAC). Lifetime Value (LTV). LTV:CAC Ratio. CAC Payback Period. Gross Margin. Contribution Margin. These together tell the story of customer profitability.
Example
Per-customer analysis:
- CAC: $500
- Monthly Revenue: $100
- Gross Margin: 70%
- Monthly Churn: 3%
LTV = ($100 × 0.70) ÷ 0.03 = $2,333
LTV:CAC = $2,333 ÷ $500 = 4.7:1
CAC Payback = $500 ÷ $70 = 7.1 months
Unit economics are healthy. Scale confidently.
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