Unit Economics
Definition
Unit economics measures profitability per customer. It's the revenue one customer generates (LTV) minus the cost to acquire and serve them (CAC + COGS). Positive unit economics = you make money on each customer.
What are Unit Economics? LTV, CAC & Profitability | early.tools
Unit economics formula: LTV - CAC - COGS = Profit Per Customer
Example: SaaS subscription. LTV = $2,000, CAC = $600, COGS (hosting, support) = $400. Unit economics = $2,000 - $600 - $400 = $1,000 profit per customer.
Why unit economics matter: You can't grow unprofitably forever. If you lose money on every customer, adding more customers just loses more money. VCs care about unit economics—they want to see a path to profitability at scale.
Positive vs. negative unit economics: Positive = LTV > CAC + COGS (you make money per customer). Negative = you lose money per customer. Some startups intentionally run negative early (Uber, DoorDash subsidized rides to build network effects), but only works if there's a credible path to positive later.
Contribution margin: Revenue per customer minus variable costs (COGS, not CAC). Contribution margin must cover CAC over time. If contribution margin is $100/month and CAC is $600, payback period is 6 months. After that, profit flows.
Unit economics at scale: Some costs decrease with scale (COGS drop with volume discounts, CAC improves with brand awareness). Don't assume current unit economics stay constant—model how they improve as you grow.
Common mistakes: (1) Ignoring COGS—only comparing LTV to CAC (you need to subtract cost to serve), (2) Using blended metrics—enterprise customers have different unit economics than SMBs, track separately, (3) Short time windows—calculating LTV from 3 months of data overstates it, (4) Not accounting for churn—LTV must factor in how long customers actually stay.
Improving unit economics: (1) Increase LTV—upsell, reduce churn, annual pricing, (2) Reduce CAC—organic channels, referrals, better targeting, (3) Reduce COGS—automation, self-serve, cheaper infrastructure, (4) Focus on high-value segments—enterprise customers often have better economics than SMBs.
Examples
Spotify has negative unit economics on free users (ads don't cover streaming costs). Premium subscribers are positive. They need 40%+ paid conversion to be profitable—currently at ~45%. Netflix has strong unit economics—low CAC (brand drives signups), high LTV ($15/month × 24 months avg = $360), low COGS per stream at scale.
Related Terms
Burn rate
Your "burn rate" represents your monthly expenses relative to your available capital. Calculate your company's potential runway by dividing your total funds by your burn rate.
CAC (Customer Acquisition Cost)
CAC is how much it costs to acquire one paying customer. Calculate it by dividing total sales and marketing spend by the number of new customers acquired in that period.
LTV (Lifetime Value)
LTV is the total revenue you expect from a customer over their entire relationship with your business. It's the north star for determining how much you can afford to spend on acquisition.