Unit Economics

---
name: unit-economics
description: Model unit economics using explicit revenue, variable cost, gross margin, acquisition, retention, expansion, service burden, and cohort assumptions so monetization decisions reflect sustainable value creation.
---
# Unit Economics

Use when pricing, packaging, growth, or business-model decisions depend on whether customer-level economics are sustainable.

## Procedure
1. Define the unit being modeled: customer, account, transaction, order, seat, workload, or another economically meaningful unit.
2. Separate recurring or transaction revenue from variable costs directly driven by serving the unit, such as infrastructure, payments, support, fulfillment, or third-party usage.
3. Calculate contribution or gross margin using accounting definitions appropriate to the decision and state what is excluded.
4. Model acquisition cost, onboarding cost, churn or retention, expansion, discounting, refunds, and support burden by cohort when data permits.
5. Estimate lifetime value only with retention assumptions that are explicit and supportable; show sensitivity rather than one heroic number.
6. Compare segments and usage bands because average customers can hide structurally unprofitable heavy or low-value cohorts.
7. Model how pricing or packaging changes alter usage, cost, margin, conversion, and retention rather than changing revenue in isolation.
8. Reconcile model outputs against observed financial or operational data and update assumptions as cohorts mature.

## Decision rules
- Define the economic unit before calculating metrics.
- Revenue growth can coexist with worsening unit economics.
- LTV is highly sensitive to retention; weak retention evidence should produce wide ranges.
- Do not label fixed overhead as variable merely to make one product look expensive.

## Quality gate
The model is decision-ready when the unit and cost definitions are explicit, calculations reconcile to available data, cohort differences and major assumptions are visible, retention-sensitive metrics include ranges, and pricing or growth choices can be evaluated against margin and sustainability rather than revenue alone.