Metrics & Finance DefinedTerm

Unit Economics

Also known as: Per-Unit Economics

Revenues and costs associated with a single unit of a business model, fundamental for evaluating scalability and profitability.

Updated: 2026-01-04

Definition

Unit Economics is the detailed analysis of revenues and direct costs associated with a single fundamental “unit” of the business model. The “unit” varies by business type: a customer (SaaS), a transaction (marketplace), a ride (ride-sharing), a room-night (hotel), an order (e-commerce).

The goal is to answer the question: “Do we make or lose money on each unit sold, excluding fixed costs?”

The conceptual formula is:

Unit Profit = Revenue per Unit minus Variable Costs per Unit

Where:

  • Revenue per Unit: how much the company earns from single unit (ARPU, AOV, GMV take rate)
  • Variable Costs per Unit: costs that scale linearly with units (COGS, CAC, transaction fees, delivery)

If Unit Profit is positive, the business is profitable at marginal level. If negative, the more you sell, the more you lose (unsustainable without clear path to positive economics).

Unit Economics are crucial because:

  • Scalability: determine whether growth generates profit or losses
  • Fundraising: VCs evaluate unit economics to ensure business is fundamentally viable
  • Prioritization: identify which segments or products are profitable
  • Pricing: guide decisions on optimal price points

The concept emerged in the 2000s with the rise of internet businesses. VCs like Bill Gurley (Benchmark) and Marc Andreessen (a16z) made it central in startup analysis. Famous cases of negative unit economics: WeWork, Uber (for years), many delivery or gig economy companies.

How it Works

Analyzing unit economics requires correctly defining the “unit” and accurately allocating costs.

Defining the Unit

SaaS: unit = customer. Key metrics:

  • Revenue per unit: ARPU (Average Revenue Per User) monthly or annual
  • Costs per unit: CAC (Customer Acquisition Cost), COGS (hosting, support)
  • Unit Profit: CLV (Customer Lifetime Value) minus CAC

E-commerce: unit = order. Metrics:

  • Revenue per unit: AOV (Average Order Value)
  • Costs per unit: COGS, shipping, payment processing, returns
  • Unit Profit: Contribution Margin per Order

Marketplace (Uber, Airbnb): unit = transaction. Metrics:

  • Revenue per unit: Take Rate % × GMV (Gross Merchandise Value)
  • Costs per unit: payment processing, customer support, incentives
  • Unit Profit: Net Take Rate after variable costs

Subscription media (Netflix, Spotify): unit = subscriber-month.

  • Revenue per unit: Monthly subscription fee
  • Costs per unit: Content costs per user, streaming infrastructure, payment fees
  • Unit Profit: Monthly Contribution Margin

Key Components

Revenue per Unit: For SaaS: ARPU. For e-commerce: AOV. For ads-based: RPM (Revenue Per Mille impressions).

Variable Costs per Unit:

  • CAC: cost to acquire unit (marketing, sales)
  • COGS: cost to produce or deliver service (materials, hosting, licensing)
  • Transaction fees: payment processing (Stripe 2-3%), marketplace fees
  • Delivery or fulfillment: shipping, last-mile, packaging
  • Direct support: CS time allocated per unit

Contribution Margin: (Revenue minus Variable Costs) / Revenue × 100. Measures percent of revenue contributing to fixed costs and profit.

Complete Formula for SaaS

SaaS Unit Economics:

  • CLV (Customer Lifetime Value): (ARPU × Gross Margin%) / Churn Rate
  • CAC (Customer Acquisition Cost): (Marketing plus Sales Costs) / New Customers
  • Gross Profit per Customer: CLV minus CAC
  • LTV/CAC Ratio: CLV / CAC (target over 3x)
  • CAC Payback: CAC / (ARPU × Gross Margin%) in months (target under 12 months)

Example:

  • ARPU: 100 euros per month
  • Gross Margin: 80%
  • Churn: 5% monthly
  • CAC: 500 euros

Calculations:

  • CLV = (100 × 0.8) / 0.05 = 1,600 euros
  • Gross Profit = 1,600 minus 500 = 1,100 euros per customer
  • LTV/CAC = 1,600 / 500 = 3.2x (healthy)
  • Payback = 500 / (100 × 0.8) = 6.25 months (excellent)

Use Cases

Evaluating Business Model Sustainability

A ride-sharing marketplace has the following unit economics per ride:

Revenue:

  • Ride price: 20 euros
  • Take rate: 25%
  • Revenue per ride: 5 euros

Variable Costs:

  • Payment processing (3%): 0.60 euros
  • Driver incentive: 2 euros (promotional)
  • Insurance per ride: 0.50 euros
  • Support (allocated): 0.40 euros
  • Total variable costs: 3.50 euros

Unit Profit: 5 minus 3.5 = 1.50 euros per ride

Seems positive at first. But include CAC:

  • CAC per rider: 30 euros
  • Average rides per rider lifetime: 15
  • CAC per ride: 30 / 15 = 2 euros

Adjusted Unit Profit: 1.50 minus 2 = -0.50 euros per ride (negative!)

Business loses money per ride. Path to profitability requires: reduce CAC, increase retention (more rides per rider), reduce incentives, or increase take rate.

Segmentation and Prioritization

A B2B SaaS analyzes unit economics by segment:

Unit economics by customer segment
SegmentARPUChurnCACCLVLTV/CACPayback
SMB508%3005001.7x7.5 months
Mid-Market5003%2,00013,3336.7x5 months
Enterprise5,0001%15,000400,00026.7x3.75 months

Insights:

  • SMB has LTV/CAC under 2x (marginally profitable, not scalable)
  • Mid-Market has healthy economics (6.7x) and fast payback
  • Enterprise has best economics but high CAC (requires specialized sales team)

Strategic decision: deprioritize SMB (low-touch, focus only on self-serve with very low CAC), invest heavily in Mid-Market (sweet spot), build enterprise sales motion (high-touch, long sales cycle but exceptional ROI).

Pricing Optimization

A SaaS tests pricing changes and impact on unit economics.

Baseline (Pro plan 100 euros per month):

  • ARPU: 100 euros
  • Churn: 5% monthly
  • CLV: (100 × 0.8) / 0.05 = 1,600 euros
  • CAC: 400 euros
  • LTV/CAC: 4x

Test A (increase to 120 euros):

  • ARPU: 120 euros
  • Churn: 6% monthly (price sensitivity)
  • CLV: (120 × 0.8) / 0.06 = 1,600 euros (stable)
  • CAC: 400 euros (unchanged)
  • LTV/CAC: 4x (no improvement)

Test B (introduce Enterprise tier 500 euros):

  • Mix: 70% Pro (100 euros), 30% Enterprise (500 euros)
  • Blended ARPU: 220 euros
  • Churn: 4% monthly (Enterprise has lower churn)
  • CLV: (220 × 0.82) / 0.04 = 4,510 euros
  • CAC: 600 euros (Enterprise requires sales touch)
  • LTV/CAC: 7.5x (major improvement!)

Test B wins: despite increasing CAC, CLV grows 3x thanks to higher ARPU and lower churn.

Marketplace Liquidity and Unit Economics

A two-sided marketplace (supply and demand) must balance economics of both.

Supply side (seller):

  • Commission: 15% GMV
  • Seller CAC: 50 euros
  • Average GMV per seller lifetime: 10,000 euros
  • Revenue per seller: 1,500 euros
  • Profit per seller: 1,500 minus 50 = 1,450 euros

Demand side (buyer):

  • Buyer CAC: 20 euros
  • Average order value: 100 euros
  • Orders per buyer lifetime: 5
  • Take rate post-costs: 10%
  • Revenue per buyer: 50 euros (5 × 100 × 10%)
  • Profit per buyer: 50 minus 20 = 30 euros

Combined unit economics: Per match (1 buyer, 1 seller facilitating 5 transactions):

  • Profit: 1,450 plus 30 = 1,480 euros
  • Requirement: maintain balanced supply or demand ratio (if too many sellers, GMV dilution; too many buyers, poor experience from supply shortage)

Path to Profitability Modeling

Pre-revenue startup models unit economics to convince investors.

Year 1 (launch, land grab):

  • CAC: 200 euros (paid ads heavy)
  • CLV: 600 euros (early high churn, 10% monthly)
  • LTV/CAC: 3x (acceptable)
  • Customer base: 1,000
  • Contribution profit: (600 minus 200) × 1,000 = 400K euros
  • Fixed costs: 1M euros
  • Net profit: -600K (loss, but positive unit economics)

Year 3 (optimization):

  • CAC: 150 euros (organic growth, referrals)
  • CLV: 1,200 euros (churn reduced to 5%, product improved)
  • LTV/CAC: 8x (best-in-class)
  • Customer base: 10,000
  • Contribution profit: (1,200 minus 150) × 10,000 = 10.5M euros
  • Fixed costs: 4M euros (scaling, but sublinear)
  • Net profit: 6.5M euros (profitable)

This shows path: positive unit economics from start, overall profitability achieved via scale and efficiency improvements.

Practical Considerations

Fixed vs Variable Costs Allocation

Clearly distinguish:

Variable costs (scale with units): COGS, CAC, transaction fees, shipping.

Fixed costs (don’t scale): engineering salaries, office rent, base infrastructure.

Semi-variable (step function): customer success team (fixed until X customers, then hiring), infrastructure (scale at thresholds).

Common error: including fixed costs in unit economics (e.g., allocating engineering salaries per customer). This distorts analysis. Unit economics must isolate marginal profitability.

Contribution Margin vs Gross Margin

Gross Margin: (Revenue minus COGS) / Revenue. Includes only direct production costs.

Contribution Margin: (Revenue minus COGS minus CAC minus Variable S&M) / Revenue. Includes all variable costs.

For SaaS:

  • Gross Margin: typically 70-90% (low COGS, mostly hosting)
  • Contribution Margin: can be negative if high CAC (early stage burning for growth)

Contribution Margin indicates if each additional unit contributes to fixed costs. If negative, growth worsens losses.

Cohort-Based Unit Economics

Unit economics evolve by cohort. Customers acquired in Q1 2023 have different CAC or CLV from Q4 2024.

Cohort analysis:

  • Early cohorts: low CAC (early adopters), but churn may be high (immature product)
  • Later cohorts: higher CAC (saturated market), but lower churn (improved product-market fit)

Best practice: calculate unit economics per cohort and track evolution. If recent cohorts have worse economics, red flag.

Time to Positive Unit Economics

Some businesses have initially negative unit economics, positive over time.

Example: marketplace. Customer’s first order:

  • CAC: 30 euros
  • Contribution margin first order: 10 euros
  • Unit profit first order: -20 euros (negative)

But after 5 orders:

  • Cumulative contribution: 5 × 10 = 50 euros
  • CAC: 30 euros (one-time)
  • Cumulative unit profit: 20 euros (positive)

This model requires working capital to sustain growth until payback. Investors look at “time to positive cumulative unit profit” beyond steady-state unit economics.

Common Misconceptions

”Positive Unit Economics Guarantee Success”

Positive unit economics are necessary but not sufficient. Also need:

TAM (Total Addressable Market): if unit profit is 100 euros but market is only 10,000 customers, maximum revenue is 1M (too small).

Growth: perfect unit economics with zero growth doesn’t create value. Need to balance profitability and velocity.

Defensibility: competitors can copy model, erode margins. Network effects, brand, IP are critical.

WeWork had apparently positive unit economics per location, but non-scalable and indefensible model (real estate is commodity).

”Just Optimize One Metric (e.g., reduce CAC)”

Optimizing one metric in isolation can damage business.

Example: reduce CAC from 500 to 300 euros by cutting paid ads. But if this reduces acquisition volume by 70%, growth collapses.

Unit economics should be optimized systemically: CAC, CLV, churn, ARPU simultaneously. Trade-offs exist (e.g., increasing ARPU can increase churn).

”Unit Economics are Static”

Unit economics change with:

  • Scale: economies of scale reduce COGS (volume discounts, infrastructure efficiency)
  • Learning: CAC drops with optimization, churn improves with product iteration
  • Competition: new entrants erode margins, require incentives
  • Product mix: shift toward enterprise (high ARPU, low churn) vs SMB alters blended economics

Best practice: model unit economics dynamically, project how they evolve with growth and market.

Sources

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