unit economics
Also called: per-customer economics, SaaS unit economics
The revenue and costs of one unit of the business, usually one customer: what it costs to win them, what they pay, what it costs to serve them and how long they stay. It shows whether each new customer makes the business richer or poorer.
Unit economics looks at a business one customer at a time. Instead of asking "is the company profitable?", it asks: when we win one more customer, how much do we spend to get them, how much gross profit do they bring each month, and how long until that customer has paid us back and then some?
For a subscription business, four numbers make up the picture: CAC (what it costs to acquire a customer), ARPA (average revenue per account per month), gross margin (the share of that revenue left after the direct cost of serving the customer) and churn (how quickly customers leave, which sets their average lifetime). From these come the two ratios people usually quote: the LTV:CAC ratio and the CAC payback period.
Good unit economics mean growth makes the business stronger: each new customer adds more than they cost. Bad unit economics mean growth makes things worse, and spending more on marketing only digs the hole faster. A young company can have poor total profit and great unit economics (it's still paying fixed costs with too few customers), which is fine; the reverse, a profitable company with a CAC that no customer ever pays back, is a warning that growth will stall.
Example
In year 2 a new GarageDesk shop pays 750 UAH a month. Serving all 240 shops costs 12,000 UAH a month in tools and SMS plus 16,000 UAH of part-time support, 28,000 / 240 ≈ 117 UAH per shop. Gross profit per new shop ≈ 750 − 117 = 633 UAH a month.
With monthly churn of about 4%, a shop stays about 1 / 0.04 = 25 months: LTV ≈ 633 / 0.04 ≈ 15,825 UAH. A shop really added by the referral program costs about 1,800 UAH; one from ads about 5,000 UAH. Referrals return 15,825 / 1,800 ≈ 8.8 times their cost and pay it back in 1,800 / 633 ≈ 2.8 months; ads return about 3.2 times and take about 7.9 months. Both work, but every hryvnia goes further in referrals.
Common mistakes
- Using revenue instead of gross profit. The cost of serving a customer comes off before comparing with CAC.
- Leaving costs out of CAC. Founder time, events and referral rewards are acquisition costs too.
- Calculating with a few months of churn data. Lifetime estimates from a young business are shaky; recheck them often.
- Averaging very different customers. Unit economics by channel or segment tell you where to grow.