Unit Economics
The revenue and costs associated with a single unit of your business — typically one customer — determining whether your business model is fundamentally viable.
What is Unit Economics?
Unit economics measures whether your business makes money on a per-customer (or per-unit) basis. The core question: does the revenue you earn from a customer over their lifetime (LTV) exceed the cost of acquiring them (CAC)?
If LTV > CAC, your business model works at the unit level — every new customer adds net value. If CAC > LTV, you're losing money on every customer, and no amount of growth will fix that.
Unit economics also includes metrics like payback period (how long until you recoup the acquisition cost) and contribution margin (revenue minus variable costs per customer). Together, these metrics tell you whether your growth is sustainable.
Why it matters
You can't scale your way out of bad unit economics. If each customer costs $500 to acquire and generates $300 in lifetime revenue, acquiring more customers just means losing more money faster.
Investors scrutinize unit economics because they reveal whether the business model works. Strong unit economics (high LTV:CAC ratio, short payback period) mean the company will become more profitable as it grows. Weak unit economics mean growth alone won't lead to sustainability.
Example
Your average customer pays $200/month, stays for 24 months (LTV = $4,800), and costs $1,200 to acquire (CAC). LTV:CAC ratio = 4:1 (excellent). Payback period = $1,200 / $200 = 6 months. These are strong unit economics — you recoup acquisition cost in 6 months and profit from that customer for the remaining 18 months.
Common mistakes
- 1Calculating LTV without accounting for churn (overstating customer lifetime)
- 2Not including all customer acquisition costs in CAC (like sales team salaries and marketing overhead)
- 3Assuming unit economics will improve with scale without evidence
Connect your economics to your runway
RunwayCal tracks revenue and costs that feed into unit economics, connecting customer-level metrics to your overall financial health.
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