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Financial Metricsessential

Unit Economics

The direct revenues and costs associated with a single unit of your business model.

Formula
Contribution Margin = Revenue per Unit - Variable Costs per Unit
Example

If each customer generates $100 in revenue with $25 variable cost, contribution margin is $75 (75%).

Good Range

Positive and improving unit economics

Warning Range

Negative contribution margin or LTV < CAC

Complete Definition

Unit economics examines the profitability of a single "unit" of your business - typically one customer, one transaction, or one product sold. Strong unit economics prove that your business model can be profitable at scale.

Why Unit Economics Matter

1. Proves business model viability 2. Shows path to profitability 3. Essential for fundraising 4. Guides growth decisions 5. Identifies optimization areas

Key Unit Economic Metrics

Per Customer

- Customer Acquisition Cost (CAC) - Customer Lifetime Value (LTV) - LTV:CAC Ratio - Payback Period

Per Transaction

- Average Order Value (AOV) - Gross Margin per Order - Contribution Margin

Healthy Unit Economics

- LTV:CAC Ratio ≥ 3:1 - Payback Period < 12 months - Positive contribution margin - Improving trends over time

Unit Economics for Different Models

- **SaaS**: LTV, CAC, MRR, Churn - **E-commerce**: AOV, Margin, Repeat Rate - **Marketplace**: Take Rate, GMV, LTV per side

Investors' Perspective

Investors prioritize unit economics because companies with strong unit economics can scale profitably. Poor unit economics mean more funding just to survive, not grow.

Used in:Unit Economics AnalysisFinancial Projections

Related Terms

Customer Acquisition Cost (CAC)
The total cost of acquiring a new customer, including marketing and sales expenses.
Customer Lifetime Value (LTV/CLV)
The total revenue a business can expect from a single customer account throughout their relationship.
LTV:CAC Ratio
The ratio between customer lifetime value and customer acquisition cost, measuring unit economics health.
Gross Margin
The percentage of revenue remaining after deducting direct costs of goods sold.

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