Unit Economics
Unit economics describes the revenues and costs associated with one unit of your business (typically one customer), used to determine if your business model is fundamentally profitable at scale.
Formula
In depth
The key unit economics metrics for SaaS and consumer apps:
1. Customer Acquisition Cost (CAC): total cost to acquire one new customer (sales + marketing spend ÷ new customers acquired)
2. Lifetime Value (LTV): total revenue generated from one customer over their entire relationship with your product
3. LTV:CAC Ratio: the return on investment of acquiring one customer. Industry benchmark: 3:1 is healthy, 5:1+ is excellent, below 2:1 is unsustainable.
4. CAC Payback Period: how many months until you've recovered the cost of acquiring a customer. Under 12 months is good; under 6 months is exceptional.
Why it matters for fundraising: VCs care more about unit economics than revenue. Strong unit economics mean you can scale — adding more marketing spend generates predictable returns. Weak unit economics mean you're buying revenue that doesn't justify the cost.
Real example
ARPU = $50/month, Gross Margin = 80%, Monthly Churn = 2%. LTV = $50 × 0.8 ÷ 0.02 = $2,000. If CAC = $400, LTV:CAC = 5:1 — excellent. CAC Payback = $400 ÷ ($50 × 0.8) = 10 months.
Tools & calculators
Related terms
MRR (Monthly Recurring Revenue)
Monthly Recurring Revenue (MRR) is the predictable, normalized monthly revenue generated from all active subscriptions. It's the north star metric for SaaS companies.
CAC (Customer Acquisition Cost)
Customer Acquisition Cost (CAC) is the total cost of acquiring one new paying customer, including all marketing and sales spend.
LTV (Lifetime Value)
Customer Lifetime Value (LTV or CLV) is the total predicted revenue you'll earn from a customer over the entire duration of your relationship.
Churn Rate
Churn rate is the percentage of customers (or revenue) that cancels or doesn't renew in a given time period. It's the single most important retention metric for subscription businesses.
Burn Rate
Burn rate is the rate at which a startup consumes its cash reserves before reaching profitability. Gross burn is total monthly spending; net burn is spending minus revenue.
Ready to build your product?
Fixed price. 21-day delivery. Senior team.
Get a free scoping call →