Unit Economics
Master CAC, LTV, and contribution margin in 35 minutes
What You'll Learn
- • Calculate Customer Acquisition Cost (CAC) and understand what drives it
- • Determine Lifetime Value (LTV) for different business models
- • Apply the LTV:CAC ratio to evaluate business health
- • Analyze contribution margin and unit-level profitability
What Are Unit Economics?
Unit economics measure the revenue and costs associated with a single "unit" of your business. That unit might be one customer, one transaction, one product sold, or one service delivered. The key question: Does each individual unit make money?
While P&L statements show overall profitability, unit economics reveal whether your business model is fundamentally sound. A company can appear profitable in aggregate while losing money on every new customer. Unit economics expose this reality before it becomes fatal.
The Three Core Metrics
Customer Acquisition Cost (CAC)
Total sales and marketing spend divided by number of new customers acquired in that period.
CAC = Total Sales & Marketing Costs / New Customers
Lifetime Value (LTV)
Total profit generated from a customer over their entire relationship with your business.
LTV = Average Revenue Per Customer × Average Customer Lifespan × Gross Margin
Note: Average Revenue should be per-period (monthly/annual), and Lifespan in matching periods.
Contribution Margin
Revenue minus variable costs (costs that scale with each unit). Shows profit before fixed costs.
Contribution Margin = (Revenue - Variable Costs) / Revenue
Healthy Unit Economics
SaaS Product
$100/month subscription, 24-month average lifespan
Makes $4 for every $1 spent acquiring customers. High margins mean room for growth.
Broken Unit Economics
Marketplace App
$15/month subscription, 6-month average lifespan
Loses money on every customer. No amount of scale fixes this without changing the model.
Unit Economics Health Check: 4 Key Questions
Every business model should answer these four questions to validate unit-level profitability. Use these benchmarks to evaluate existing businesses or stress-test new opportunities before committing capital.
LTV:CAC Ratio
Question: How much value does each customer generate relative to acquisition cost?
LTV:CAC Ratio = Lifetime Value / Customer Acquisition Cost
Benchmark:
- 3:1 or higher = Healthy
- 1:1 to 3:1 = Marginal
- Below 1:1 = Unsustainable
SaaS companies typically target 3:1 minimum, with 5:1+ indicating strong product-market fit.
CAC Payback Period
Question: How long until a customer's revenue covers their acquisition cost?
CAC Payback = CAC / (Monthly Revenue per Customer × Gross Margin)
Benchmark:
- Under 12 months = Excellent
- 12-18 months = Acceptable
- Over 18 months = High risk
Faster payback means less working capital required to fund growth. Enterprise SaaS often runs 12-24 months.
Contribution Margin
Question: What percentage of revenue remains after variable costs?
Contribution Margin % = (Revenue - Variable Costs) / Revenue × 100
Benchmark by Business Type:
- SaaS: 70-90%
- Services: 50-70%
- E-commerce: 30-50%
Higher margins provide more room to invest in growth while maintaining profitability.
Monthly Churn Rate
Question: What percentage of customers cancel each month?
Monthly Churn % = (Customers Lost / Starting Customers) × 100
Benchmark:
- Under 5% = Strong retention
- 5-7% = Acceptable
- Over 10% = Product-market fit issue
Lower churn extends customer lifetime, increasing LTV. B2B SaaS typically sees 3-5% monthly churn.
Worked Example: SaaS Product at $50K MRR
Given Metrics
Health Check Results
LTV = $100 × 24 = $2,400 | Ratio = $2,400 / $600 = 4:1
$600 / ($100 × 0.80) = 7.5 months
High margin typical for SaaS
Strong retention for B2B SaaS
Analysis
- LTV:CAC 4:1 exceeds 3:1 benchmark. Strong unit economics.
- 7.5-month payback under 12-month target. Low capital requirements for growth.
- 80% margin provides room to invest in sales and marketing while staying profitable.
- 4% churn indicates solid product-market fit. Customers staying 25 months on average.
- Verdict: Healthy fundamentals. Ready to scale with confidence.
Interactive Calculator: Test Your Business Model
Enter your business metrics below to calculate unit economics and see how your model stacks up against industry benchmarks. The calculator will flag potential issues and highlight what's working.
Unit Economics Calculator
Average monthly revenue from one customer
How long customers stay subscribed
Costs that scale with each customer
Total cost to acquire one customer
Calculated Results
Healthy Unit Economics
All metrics meet or exceed industry benchmarks. Your business model has strong fundamentals.
Knowledge Check
Answer these 5 questions to test your understanding. You need 80% (4 out of 5) to pass and unlock the next module.