What is unit economics and why does it matter?

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Understanding unit economics

Unit economics measures the direct revenue and costs associated with a single customer or unit of product. It helps you understand whether scaling will lead to profit or loss.

Core metrics:

  • Customer Acquisition Cost (CAC): how much it costs to acquire a customer
  • Lifetime Value (LTV): total revenue expected from a customer over their relationship
  • Contribution margin: revenue minus direct variable costs

Why it matters

If LTV is greater than CAC by a comfortable margin (commonly LTV/CAC > 3), scaling customer acquisition can be profitable. Poor unit economics mean growth leads to mounting losses.

How to improve unit economics

  1. Lower CAC through more efficient channels.
  2. Increase LTV via retention, upsells, and higher pricing.
  3. Reduce variable costs to improve contribution margin.

Use in decision-making

Unit economics inform hiring, marketing spend, and fundraising. Investors often ask for these metrics because they indicate whether the business model can scale sustainably.