Unit economics: definition, formulas and two worked examples

What are unit economics?

Unit economics measure whether a business makes or loses money on a single unit of what it sells, before fixed costs such as rent, salaries for central teams and R&D. The "unit" is whatever repeats: one customer for a subscription business, one order for a store, one ride for a marketplace.

The question unit economics answer is simple: if we add one more customer (or order), do we come out ahead, and how long does it take? If the answer is no, growth makes losses bigger, not smaller.

The core unit economics metrics

Worked example: a SaaS subscription

Sample numbers for a B2B tool:

• Average revenue per account (ARPA): $80 per month
• Gross margin (after hosting, support, payment fees): 78%
• Monthly customer churn: 2.5%
• Blended CAC: $900

Calculation:

1. Gross profit per customer per month = $80 × 0.78 = $62.40
2. Expected lifetime = 1 ÷ 0.025 = 40 months
3. LTV = $62.40 ÷ 0.025 = $2,496
4. LTV : CAC = $2,496 ÷ $900 = 2.8 : 1
5. CAC payback = $900 ÷ $62.40 = 14.4 months

A common benchmark for SaaS is LTV:CAC of at least 3:1 and payback under 12 to 18 months. This business is close: it recovers acquisition cost in a bit over a year and earns 2.8 times it over a customer's life. The fastest levers are churn (at 2% monthly churn, LTV rises to $3,120 and the ratio to 3.5) and CAC by channel; see LTV to CAC ratio.

Worked example: an online store

For a store, start with one order (sample data):

If acquiring a first-time buyer costs $30, the first order loses $6.12. The customer becomes profitable only on a repeat purchase: they need about 1.26 orders' worth of contribution to cover acquisition. With 2.2 orders in the first year, the customer contributes $52.54, or $22.54 after CAC. Repeat rate is therefore as important as conversion rate; see repeat purchase rate and average order value.

Why unit economics matter

• Growth amplifies them. Positive unit economics make each new customer worth acquiring; negative ones make growth burn cash faster.
• They show which lever to pull. Price, margin, churn, CAC and repeat rate each move a specific line.
• Investors read them first. Ratios such as LTV:CAC, payback and burn multiple summarize whether growth is efficient.

Common mistakes

• Using revenue instead of gross profit in LTV. It overstates value by the cost of serving customers.
• Blended CAC only. Organic customers make paid channels look cheap. Calculate CAC per channel.
• Assuming churn stays flat. Early cohorts often churn faster or slower than later ones; check by cohort.
• Ignoring time. A 5:1 LTV:CAC with a 40-month payback can still run out of cash.
• Forgetting refunds, discounts and support costs. They belong in the per-unit costs.

Measuring the inputs

Unit economics are only as good as their inputs: which channel brought each customer, when they converted, how much they paid and whether they stayed. In TapCub, revenue events, sign-ups and source attribution give CAC by channel when you combine them with spend; retention by cohort gives churn; revenue reports give ARPU and order value. See ARPU and net revenue retention for the related revenue metrics.

See also: Value metric.

Sources

• a16z. 16 startup metrics.
• Skok, D. SaaS metrics 2.0: a guide to measuring and improving what matters. For Entrepreneurs.
• David Skok. The startup killer: the cost of customer acquisition (For Entrepreneurs).