What Is Unit Economics?
Unit economics measures profitability at the individual customer or order level. The foundation of a scalable business model.
Key Takeaways
- Unit economics asks: do we make money on each individual unit or customer?
- The LTV:CAC ratio is the core unit economics metric
- A ratio above 3:1 is generally healthy; below 1:1 means you lose on every customer
- Prove positive unit economics before scaling — scaling negative unit economics destroys value
What unit economics means
Unit economics is the analysis of revenue and costs at the level of a single unit — a single customer, order, or product. The central question: if I look at one customer in isolation, am I making money or losing it? Positive unit economics means more customers = more profit. Negative unit economics means faster growth = faster losses.
The LTV:CAC ratio
The most important unit economics metric is the ratio of Customer Lifetime Value (LTV) to Customer Acquisition Cost (CAC). If LTV is £600 and CAC is £150, your ratio is 4:1 — for every £1 spent acquiring a customer, you earn £4 back. That is a strong business.
Benchmarks for LTV:CAC
Below 1:1 means you lose money on every customer. Between 1:1 and 3:1, the business works but margins are tight. Above 3:1 is generally healthy. Above 5:1 often means you are under-investing in growth — you could afford to spend more on acquisition and still be profitable.
Contribution margin per order
For eCommerce, unit economics often focuses on contribution margin per order: revenue minus COGS, shipping, payment processing, and returns provision. If each order generates £12 of contribution margin but you spend £15 in marketing to acquire that customer, you are underwater on the first order. The question: does the customer buy again enough to make the economics work?
Never scale negative unit economics
One of the most common and costly startup mistakes is scaling acquisition before proving unit economics. Adding more customers to a model with negative unit economics accelerates losses. Prove unit economics in a small, controlled way first. Only then invest in scaling.