Unit economics
Also known as: unit economics model
Unit economics is the revenue and cost of a single customer or transaction, isolated from the rest of the business, so a company can see whether that one unit is profitable on its own.
The two numbers that matter most are customer lifetime value (LTV) and customer acquisition cost (CAC). A company can be growing revenue every quarter and still lose money on every customer it signs, and unit economics is the check that catches it before the bank balance does.
LTV = average monthly gross margin per customer × average customer lifetime, in months
LTV : CAC ratio = LTV / CACExample
Take a customer who pays $200 a month, with gross margin of 75%, so $150 a month in gross margin. If the average customer stays 20 months, lifetime value is $150 × 20, or $3,000. If it costs $750 to acquire that customer, the LTV to CAC ratio is 4 to 1. Change the average lifetime to 10 months instead of 20, and the same acquisition cost turns a 4-to-1 ratio into 2 to 1, without a single price or spend number changing.
These figures are illustrative, chosen to show how sensitive the ratio is to lifetime, not a published benchmark for any market.
How to use it
Build unit economics per plan or per segment, not only for the company as a whole. A $50-a-month plan and a $2,000-a-month enterprise plan rarely share the same acquisition cost or the same churn, and a blended number hides which one is carrying the business. Recalculate the ratio whenever pricing, churn or the cost of a channel moves, since unit economics is a snapshot, not a fixed fact about the company.
Common mistakes
A frequent mistake is estimating lifetime from a hope rather than actual churn data, which inflates LTV for a company that has not yet earned that retention. Another is leaving out support costs, onboarding time and account management from the cost side, so the unit looks more profitable than it is. A third is comparing the ratio across companies of different sizes as if it were a single external standard, when the acceptable range depends on the cost of capital and the stage of the business.
Read unit economics alongside a CAC payback period calculation. A healthy ratio with a long payback can still starve a company of cash before the value shows up.