Unit Economics
Definition
Unit economics is the analysis of revenue and costs associated with a single unit of a business model, typically one customer or one transaction. Positive unit economics means each customer generates more revenue than they cost to acquire and serve, which is a prerequisite for sustainable scaling.
Overview
Unit economics examines whether a business model works at the individual customer or transaction level. If each new customer costs more to acquire and serve than they generate in revenue, scaling the business only accelerates losses. Positive unit economics is the foundation upon which sustainable growth is built.
The core unit economics metrics for SaaS are LTV, CAC, LTV:CAC ratio, CAC payback period, gross margin, and contribution margin. Together, they paint a complete picture of whether a company's business model creates value at the customer level and how efficiently it does so.
Investors evaluate unit economics at every stage, but expectations vary. Pre-seed companies may have unproven unit economics and rely on assumptions. By Series A, investors expect demonstrated LTV:CAC ratios based on real cohort data. By Series B, unit economics should be stable and improving with scale. Deteriorating unit economics at any stage is a serious concern.
Example
A startup acquires a customer for $400 (CAC) who pays $100/month at 80 % gross margin and stays 2 years. Unit economics: LTV = $100 × 0.80 × 24 = $1,920 versus $400 CAC, strong 4.8:1 ratio.
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