Unit economics

Revenue and cost per unit of the business, usually per customer: what it costs to win one and what it earns before overhead.

DefinitionRevenue and cost per unit of the business, usually per customer: what it costs to win one and what it earns before overhead.

Unit economics is the profit and loss of a single unit of the business, most often one customer, sometimes one order or one location. It asks whether each unit pays back what it cost to acquire and serve, before fixed overhead. If it does not, growth makes losses bigger, not smaller.

How it is computed

Contribution per customer per month = revenue - variable costs. Payback months = customer acquisition cost / monthly contribution. Lifetime value = monthly contribution / monthly churn rate, compared with acquisition cost as an LTV:CAC ratio.

Example

A customer costs $1,200 to acquire and pays $150 a month with $50 of variable cost, so contribution is $100 a month and payback is 12 months. At 2% monthly churn the expected lifetime is 50 months, lifetime value is $5,000 and LTV:CAC is about 4.2.

Where it goes wrong

Blended averages that hide a loss-making segment, and acquisition cost that leaves out sales salaries. The full guide is unit economics.

Articles that use this term

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