Unit Economics: The Foundation of Every Sustainable Business Model

What unit economics are#

Unit economics are the financial metrics at the level of a single unit of business — one customer, one order, one transaction. The most important unit economics metrics are Contribution Margin Per Customer (how much each customer contributes after variable costs), Customer Acquisition Cost (what it costs to acquire one customer), and Lifetime Value (how much revenue or profit one customer generates over their relationship with you). These three numbers tell you whether the fundamental business model works at the unit level.

Contribution margin per unit#

Contribution margin is revenue per unit minus all variable costs — cost of goods, fulfilment, payment processing, packaging, and customer support cost per order. It is the amount each unit contributes toward fixed costs and profit. If your contribution margin is negative — each unit costs more in variable costs than it generates — you cannot fix this by selling more units. Negative contribution margin means the business model is fundamentally broken at the unit level.

The CAC payback period#

CAC payback period is how long it takes to recover the cost of acquiring a customer from that customer's contribution margin. If it costs £120 to acquire a customer who contributes £20 per month, the payback period is 6 months. The shorter your payback period, the less capital you need to fund growth — each customer starts contributing to funding the next customer's acquisition cost sooner. A payback period above 12-18 months typically requires external financing to fund growth.

The LTV:CAC ratio#

The LTV:CAC ratio most precisely captures the health of a business model. Below 1 means you lose money on every customer. 1-2x means you break even. Above 3x is the threshold of a healthy model. Above 5x may indicate under-investment in acquisition. The ideal LTV:CAC ratio is 3-5x for most business models. Investors expect to see this ratio and its trend — improving LTV:CAC over time is the signature of a business that is working and that will work better at scale.

Tracking unit economics with AskBiz#

AskBiz calculates contribution margin per order, CAC by channel, CLV by cohort, LTV:CAC ratio, and payback period as continuous time-series metrics from your connected data. Ask it: what is my current LTV:CAC ratio, which acquisition channel has the best unit economics, how has my contribution margin per order changed this quarter, what is my average CAC payback period.