Unit economics

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Definition
Unit economics is the question of whether a business makes money on one customer, after everything it cost to win and serve them.

Why it matters

A company can grow fast and destroy value at the same time. If every new customer loses money, growth only digs the hole faster. Revenue charts hide this, because revenue goes up either way. Unit economics shows the problem early, while the fix is still cheap.

It also sets the limits of your marketing. If a customer brings £3,600 of gross profit and costs £1,200 to win, you can afford to spend more to grow. If the numbers are the other way round, more spend only makes things worse. Investors and lenders ask for these figures for the same reason: they show whether the business model works before scale is added.

Averages mislead here, so the numbers should be split by channel, segment and plan. A profitable segment can hide a loss-making one for years.

How to apply it

  • Calculate acquisition cost and lifetime value from real data, not hopes.
  • Split every number by channel, segment or product. An average hides the customers who lose money behind the ones who make it.
  • Check the payback period against your cash. A good ratio is still a problem if the money takes two years to come back.
  • Move spend toward the segment that pays back fastest, and question the offer or the target customer where the numbers fail.

What it is

Instead of looking at the whole company, unit economics looks at one unit: one customer, one order or one subscription. The question is whether that unit earns more than it costs. The main ingredients are:

  • Customer Acquisition Cost (CAC): all sales and marketing spend divided by customers won.
  • Lifetime Value (LTV): the gross profit a customer brings over the whole relationship.
  • CAC Payback Period: how many months it takes to earn the acquisition cost back.
  • Gross Margin: what is left from each sale after the direct cost of delivering it.

Say a customer costs £1,200 to win and brings £3,600 of gross profit over their life. That is a ratio of three to one, a common rule of thumb for a healthy business.

Common mistakes

  • Leaving out the cost of the people running sales and support.
  • Using revenue instead of gross profit for lifetime value.
Worked example

Suppose a B2B company spends £120,000 a year on marketing and sales and wins 100 customers, so customer acquisition cost is £1,200. Each customer brings £3,600 of gross profit over the relationship, a ratio of three to one. Blended, that looks healthy. The team then splits the numbers by channel in Databox, which pulls its figures into one dashboard. In this example, referrals return six to one, while paid social returns one to one with a payback of two years, so the cash arrives too late to fund the next campaign. Spend moves towards referrals, and the paid social offer is narrowed. The average had been hiding the channel that loses money.

Tools in the example

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Related terms

  1. Article

    LTV to CAC Ratio

    The single number most often used as the test.

  2. Article

    Contribution Margin

    Profit per unit after variable costs.

  3. Article

    Scorecard (Weekly Metrics)

    Where these figures get watched week to week.

  4. Article

    Pirate metrics

    The stage-by-stage view that unit economics summarises.

Where it shows up

  • PlaybookFinanceReporting
    Financial statements
    Profit and loss and the balance sheet are the two statements that show the financial health of your business. Every scale-up founder needs to read them as fluently as they read their own product.
    3 chapters