Unit Economics

---
name: unit-economics
description: Work out whether one customer or one transaction makes money, before scaling anything. Use when deciding to grow, raise prices, or cut costs, and when growth is not producing profit.
---

# Unit economics

Growth multiplies whatever the unit already is. A business with negative
unit economics gets worse as it grows, which is why this calculation
comes before every growth decision rather than after the first bad
quarter.

## Method

1. **Define the unit precisely.** One customer, one order, one seat, one
   delivery. Different units give different answers and only one matches
   the decision you are making.
2. **Include every variable cost.** Payment fees, support, hosting,
   fulfilment, and the portion of headcount that scales with volume.
   Excluding support is the most common way unit economics look good and
   are not.
3. **Compute contribution margin first.** Revenue per unit minus
   variable cost per unit. If this is negative, no volume fixes it and
   nothing else matters.
4. **Compare lifetime value to acquisition cost honestly.** Lifetime
   value uses contribution margin rather than revenue, and includes real
   retention rather than an assumed one (see saas-metrics).
5. **Measure payback period, not just the ratio.** How long until an
   acquired customer repays their acquisition cost decides whether you
   can fund growth from operations or must raise (see
   cash-flow-management).
6. **Segment before concluding.** Blended unit economics hide that one
   channel or customer type is profitable and another is not, which is
   the actionable finding.
7. **Re-check as you scale.** Economies of scale improve some costs and
   worsen others, particularly support and sales complexity.

## Boundaries

Unit economics describe the current model; a business may rationally run
negative early while building something that changes them, which is a
deliberate bet rather than an accident. Allocating fixed costs into a
unit calculation distorts it. Long payback periods can be sound with
patient capital and fatal without it.