What are Unit Economics?
Unit Economics refers to the direct revenues and costs associated with a specific business “unit” — typically a single customer or a single order. Healthy unit economics mean each customer or transaction is profitable on its own.
Why It Matters
You can’t scale your way out of bad unit economics. If you lose $5 on every customer, selling to a million customers doesn’t fix the problem — it makes it $5M worse. Unit economics tell you whether your business model fundamentally works.
Key Components
- Revenue per unit: AOV, ARPU, or first-order revenue
- Direct costs per unit: COGS, shipping, fulfillment, payment processing
- Acquisition cost per unit: CAC
- Lifetime value per unit: LTV
The Unit Economics Stack
- Gross Margin: Revenue minus COGS
- Contribution Margin: Gross Margin minus variable costs
- Customer Profit: LTV minus CAC (over the full lifetime)
When to Worry
- CAC exceeds first-order contribution margin AND payback is >6 months
- Contribution margin is declining over time
- LTV:CAC ratio is below 2:1
- Increasing revenue but decreasing margin per unit