Unit Economics

Unit economics examine revenue, costs, and profit per unit, such as per customer or per order. They show whether the business works already at the smallest level. Only when the unit economics are sound does it make sense to scale a business significantly.

The appropriate unit depends on the business model: in subscription businesses the individual customer, in retail the order, in manufacturing the item, on a marketplace the transaction intermediated. What is then examined is revenue per unit, directly attributable costs, contribution, and, in subscription businesses, acquisition cost against the contribution achievable over the customer lifetime. The central point is most clearly stated negatively: if an additional unit produces no positive contribution, growth worsens the problem rather than solving it. Scale helps only where fixed costs are spread across more units, not where each unit is loss-making in itself. That is precisely why investors examine this calculation before providing growth capital.

It becomes informative only in a breakdown by channel, customer group and cohort, because averages mix profitable and unprofitable segments. A clean separation between genuinely variable costs and allocated overheads also deserves attention. The core measures are contribution per customer, the cost of acquiring a customer, the time until that cost is recovered and the contribution over the entire customer relationship.

Rules of thumb in investment practice are a lifetime value to acquisition cost ratio of at least three and a payback period of no more than twelve months, though both figures vary widely by business model and contract length. It matters that acquisition costs include all sales and marketing expenses including personnel, not just direct advertising spend.