Analyze contribution margin, payback, and profitability at the customer and unit level.
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Monthly revenue per customer or unit
Cost of goods sold per unit per month
Total cost to acquire one customer
Average months before a customer churns
Overrides lifetime if provided (lifetime = 1/churn)
Unit economics is the foundation of every sustainable business model. It measures the direct revenues and costs associated with a single unit of your business -- typically one customer, one transaction, or one product sold. If your unit economics are healthy, scaling your business amplifies profits. If they are broken, scaling only amplifies losses.
Gross Margin per Unit is the difference between what you charge and what it costs to deliver your product or service. For SaaS businesses, a gross margin of 70-80% or higher is the benchmark. For e-commerce, 40-60% is typical. Physical goods businesses often operate at 20-40%.
Customer Lifetime Value (LTV) represents the total gross profit a customer generates over their entire relationship with your business. It accounts for both the per-unit margin and how long customers stick around.
The LTV to CAC ratio is the most watched metric in subscription businesses. It tells you how much value you create for every dollar spent on customer acquisition:
Even with a great LTV:CAC ratio, a long payback period can kill a business through cash flow problems. If it takes 18 months to recover CAC but you are growing 20% month over month, you need significant capital reserves to fund that growth gap. The best businesses recover CAC in under 12 months.
Contribution margin goes beyond gross margin by factoring in the amortized cost of customer acquisition. It represents the true per-unit economics after all direct and acquisition costs. A positive contribution margin means each unit contributes to covering your fixed operating costs (engineering, G&A, office space, etc.).
There are four levers to improve unit economics: increase revenue per unit (upsell, cross-sell, raise prices), reduce COGS (negotiate supplier terms, improve efficiency), reduce CAC (optimize marketing channels, improve conversion rates), and increase customer lifetime (reduce churn, improve product value).