Definition
Unit economics describe the revenue and costs tied to a single "unit" of the business, usually one customer. They answer one question: does each new customer make the company money, or cost it money?
The key numbers for a subscription business
- ARPA: what a customer pays each month
- Gross margin: how much of that is left after the cost to serve them
- Churn rate: how long they stay
- LTV: total gross profit over their lifetime
- CAC: what it cost to win them
- CAC payback: how long until they've paid that back
Example
ARPA $50, gross margin 80%, monthly churn 2.5%, CAC $400.
- LTV: ($50 × 0.8) ÷ 0.025 = $1,600
- LTV : CAC = 4 : 1
- Payback: $400 ÷ $40 = 10 months
Healthy unit economics: each customer earns back their acquisition cost in under a year and is worth four times what they cost.
Signs they're broken
- LTV is lower than CAC: every new customer loses money.
- The cost to serve a customer is higher than the price.
- Payback is longer than the average customer stays.
When unit economics are broken, growing faster makes losses bigger. Fix price, cost to serve or retention before spending more on acquisition.