Unit Economics

Unit Economics

When to Use This Skill

Use this skill when you need to:

• Calculate the profitability of each customer, sale, or transaction
• Determine LTV, CAC, contribution margin, and payback period
• Evaluate whether your business model is fundamentally viable
• Prepare unit economics for investor presentations or strategic decisions

DO NOT use this skill for aggregate financial projections (use financial-projection) or pricing strategy (use pricing-strategy). This is for per-unit profitability analysis.

Core Principle

IF THE UNIT ECONOMICS DO NOT WORK FOR ONE CUSTOMER, THEY DO NOT WORK FOR A THOUSAND — SCALE AMPLIFIES UNIT ECONOMICS, IT DOES NOT FIX THEM.

Phase 1: Inputs

Required Inputs

GATE: Do not proceed without revenue per customer and cost to serve.

Phase 2: Core Calculations

## Unit Economics: [Product/Business]

### Per-Customer Revenue
| Metric | Value | Notes |
|--------|-------|-------|
| Average revenue per transaction | $[X] | |
| Transactions per month | [X] | |
| Monthly revenue per customer | $[X] | |
| Average customer lifespan | [X] months | |
| **Lifetime Value (LTV)** | **$[X]** | Monthly rev x lifespan |

### Per-Customer Costs
| Cost Component | Per Transaction | Per Month | Lifetime |
|---------------|----------------|-----------|----------|
| COGS / delivery | $[X] | $[X] | $[X] |
| Support / service | $[X] | $[X] | $[X] |
| Platform / transaction fees | $[X] | $[X] | $[X] |
| **Total cost to serve** | **$[X]** | **$[X]** | **$[X]** |

### Contribution Margin
| Metric | Per Month | Per Lifetime |
|--------|-----------|-------------|
| Revenue | $[X] | $[X] |
| - Cost to serve | $[X] | $[X] |
| **= Contribution margin** | **$[X]** | **$[X]** |
| **Contribution margin %** | **[X]%** | **[X]%** |

### Acquisition Economics
| Metric | Value | Formula |
|--------|-------|---------|
| Customer Acquisition Cost (CAC) | $[X] | Total marketing / New customers |
| LTV | $[X] | As calculated above |
| **LTV:CAC ratio** | **[X]:1** | LTV / CAC |
| **Payback period** | **[X] months** | CAC / Monthly contribution margin |
| CAC as % of LTV | [X]% | CAC / LTV x 100 |

Phase 3: Health Assessment

Benchmark Analysis

## Unit Economics Health Check

| Metric | Your Value | Healthy Benchmark | Status |
|--------|-----------|-------------------|--------|
| LTV:CAC | [X]:1 | >3:1 | [Healthy/Warning/Critical] |
| Payback period | [X] months | <12 months | [Healthy/Warning/Critical] |
| Contribution margin | [X]% | >50% | [Healthy/Warning/Critical] |
| Gross margin | [X]% | >60% (SaaS), >40% (product) | [Healthy/Warning/Critical] |
| CAC as % of first-year revenue | [X]% | <33% | [Healthy/Warning/Critical] |

### Interpretation
- **LTV:CAC > 3:1:** Healthy — room to invest more in acquisition
- **LTV:CAC 1-3:1:** Caution — improve retention or reduce CAC
- **LTV:CAC < 1:1:** Critical — losing money on every customer
- **Payback > 18 months:** Need significant capital to fund growth

Sensitivity Table

## Sensitivity: What Moves the Needle

### Impact of Improving Each Lever by 10%
| Lever | Current | +10% | LTV:CAC Impact |
|-------|---------|------|---------------|
| Price increase | $[X] | $[X] | [X]:1 → [X]:1 |
| Reduce churn (extend lifespan) | [X] mo | [X] mo | [X]:1 → [X]:1 |
| Reduce CAC | $[X] | $[X] | [X]:1 → [X]:1 |
| Reduce COGS | $[X] | $[X] | [X]:1 → [X]:1 |

Phase 4: Recommendations

## Action Plan

### Priority Lever: [Highest-impact lever from sensitivity]
[Specific recommendations to improve this lever]

### Unit Economics Improvement Roadmap
1. **Quick win:** [Action with immediate impact]
2. **Medium-term:** [Action requiring 1-3 months]
3. **Long-term:** [Structural change for sustained improvement]

### Monitoring
Track these metrics monthly:
- [ ] LTV (recalculate quarterly as lifespan data improves)
- [ ] CAC (by channel if possible)
- [ ] Contribution margin (watch for cost creep)
- [ ] Payback period (should decrease over time)

Example: SaaS ($49/month, 14-month avg lifespan)

LTV: $686. CAC: $180 (blended across channels). Monthly COGS: $8. Contribution margin: $41/month (84%). LTV:CAC: 3.8:1. Payback: 4.4 months.

Assessment: Healthy unit economics. Biggest lever is retention — extending average lifespan from 14 to 16 months increases LTV by $82 and LTV:CAC to 4.3:1.

Anti-Patterns

• Using gross LTV without subtracting cost to serve — LTV should represent gross profit, not gross revenue. A $100/month customer with $80/month costs has a $20/month contribution.
• Blending CAC across all channels — calculate CAC per channel. Your Google Ads CAC and referral CAC are likely very different.
• Ignoring expansion revenue — upsells and cross-sells increase LTV. Include them if tracking is available.
• Static calculations — unit economics change as you scale. Recalculate quarterly.
• Assuming constant churn — early churn is usually higher than late churn. Cohort analysis gives more accurate lifespan estimates.

Recovery

• No CAC data: Estimate based on total marketing spend divided by new customers. Commit to tracking by channel going forward.
• No churn data (one-time purchases): Use repeat purchase rate instead of churn. LTV = Average order value x Average lifetime purchases.
• Negative unit economics: Identify which lever (price, COGS, CAC, retention) is most fixable. Show the math for what needs to change to reach 3:1 LTV:CAC.
• Very early stage (< 50 customers): Acknowledge that the data is preliminary. Use current numbers as a hypothesis and plan to validate with 3-6 months of additional data.