How to calculate and analyze Unit Economics?
Posted: Tue Mar 18, 2025 8:53 am
There are two ways to approach calculating unit economy, depending on how you choose to define a unit.
Method 1
Define the unit as “One item sold.”
When the unit is "one item sold," Unit Economics can be determined by mom database calculating the contribution margin. This metric measures the amount of revenue from a sale less the variable costs associated with that sale: Contribution margin = unit price – variable costs per sale
Method 2
Define the unit as “One customer”.
When the unit is “a customer”, Unit Economics is determined by the relationship of two different metrics:
Customer Lifetime Value (LTV). How much money a company receives from a given customer before the customer "churns" or stops doing business with the company.
Customer Acquisition Cost (CAC). The cost of attracting a customer.
The equation is: Customer Lifetime Value divided by Customer Acquisition Cost: (LU = LTV / CAC)
Method 1
Define the unit as “One item sold.”
When the unit is "one item sold," Unit Economics can be determined by mom database calculating the contribution margin. This metric measures the amount of revenue from a sale less the variable costs associated with that sale: Contribution margin = unit price – variable costs per sale
Method 2
Define the unit as “One customer”.
When the unit is “a customer”, Unit Economics is determined by the relationship of two different metrics:
Customer Lifetime Value (LTV). How much money a company receives from a given customer before the customer "churns" or stops doing business with the company.
Customer Acquisition Cost (CAC). The cost of attracting a customer.
The equation is: Customer Lifetime Value divided by Customer Acquisition Cost: (LU = LTV / CAC)