What are unit economics?
Unit economics strip a business down to a single unit, often one customer or one order, and ask: does this unit make money? If not, growth only multiplies the losses.
Key metrics
- Customer acquisition cost (CAC) = Sales and marketing spend ÷ New customers acquired
- Customer lifetime value (LTV) = Average revenue per customer × [Gross profit](/glossary/gross-profit) margin × Average customer lifetime
- LTV:CAC ratio: often targeted at 3:1 or higher
- CAC payback period = CAC ÷ Monthly gross profit per customer
- Contribution margin per unit = Price − [Variable costs](/glossary/variable-cost)
Example
A subscription box costs $40 a month with a 50% gross margin ($20 profit). Customers stay 15 months on average, so LTV = $300. Marketing costs $75 per new customer.
- LTV:CAC = 300 ÷ 75 = 4:1
- Payback = 75 ÷ 20 = 3.75 months
Why it matters
- Shows whether to invest more in growth.
- Highlights pricing, retention or cost problems.
- Investors look closely at unit economics, especially for startups with [burn rate](/glossary/burn-rate) concerns.
Improving unit economics
- Raise prices or average order value
- Reduce churn
- Lower acquisition costs through referrals and organic channels
- Cut variable costs per unit