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Unit Economics

Profitability per unit (customer, transaction).

Unit Economics analyze profitability at the unit level (a customer, a transaction, a product). For a SaaS, this means understanding how much it costs to acquire a customer (CAC) vs how much they generate (LTV). Healthy unit economics are prerequisites to scaling a business.

Formula

Unit Economics = LTV - CAC (with LTV/CAC ratio > 3:1)

Unit economics are "healthy" when LTV is significantly higher than CAC, ideally 3x or more.

Concrete Example

A SaaS with CAC = $500, LTV = $2,000, Payback = 6 months.

Unit Economics = $2,000 - $500 = $1,500 profit per customer. 4:1 ratio = excellent.

Tips

  • Calculate unit economics by acquisition channel
  • Track evolution over time (cohorts)
  • VCs want to see healthy unit economics
  • Improving retention has the biggest impact

Common Mistakes

  • Ignoring hidden costs (support, infrastructure)
  • Calculating over too short periods
  • Not segmenting by customer type

Related Terms

LTVCACLTV CAC RATIOPAYBACK PERIODGROSS MARGIN

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