Guide
Unit EconomicsGuide
Growing is good, if every new customer pays for itself. Unit economics tells you what one customer costs you and what they leave behind. The first mirror to look into before you scale.
Author: Alp SuleimanPublished
What it is
The maths of a single customer
Unit economics measures not whether the business is growing but whether winning and keeping one customer is profitable. It surfaces what total revenue and total cost bury: what goes in and what comes out, per customer.
It is a chain of six measures. Each link uses the one before, so an error anywhere is carried to the end.
The thresholds below (around 3 for LTV:CAC, under 12 months for payback) are widely used rules of thumb, not universal laws. They shift with sector, margin and cash position.
If every customer doesn't pay for itself, growth just grows the loss.
The chain
Six links, in order
From ARPU to payback. The formula, what it tells you, and how to improve each:
ARPU
- Formula
- ARPU = revenue for the period ÷ active customers
- What it tells you
- What you earn from an average customer per period.
- How to improve
- Pricing and packaging, upsell, cross-sell. Customers who arrive through discounts quietly pull ARPU down.
Gross margin
- Formula
- Gross margin = (revenue − direct cost) ÷ revenue
- What it tells you
- How much of each lira earned actually stays with you. The links below look at this share, not at revenue.
- How to improve
- Sourcing and delivery cost, support load, product mix. Avoid pushing low-margin items.
CAC
- Formula
- CAC = sales and marketing spend ÷ new customers
- What it tells you
- What you spend on average to win one customer.
- How to improve
- Conversion rate, channel mix, referral and organic channels, a shorter sales cycle.
LTV
- Formula
- LTV = ARPU × gross margin × average customer lifetime (≈ 1 ÷ churn rate)
- What it tells you
- An estimate of the gross profit one customer leaves you over their lifetime.
- How to improve
- Lower churn (onboarding, product value), higher ARPU, repeat purchase. Churn is the strongest lever.
LTV:CAC
- Formula
- LTV:CAC = LTV ÷ CAC
- What it tells you
- How much each lira spent returns over the customer's life. A common rule of thumb is about 3 or higher; if it is far above that, you may be under-investing.
- How to improve
- The numerator, the denominator or both: grow LTV, shrink CAC. Check which one moves more cheaply first.
CAC payback
- Formula
- Payback (months) = CAC ÷ (monthly ARPU × gross margin)
- What it tells you
- How many months it takes to earn back what you spent winning the customer, which is to say cash pressure. A common rule of thumb is under 12 months.
- How to improve
- Lower CAC, raise ARPU or margin, offer annual prepayment.
Thresholds are common rules of thumb; read them against your own sector and cash position.
Worked example
A tour in numbers
The numbers below are entirely hypothetical, chosen only to show how the chain works. They describe no real company.
Example, hypothetical
Assumptions
- Monthly ARPU
- 100 ₺
- Gross margin
- 70%
- Monthly churn
- 4%
- CAC
- 600 ₺
- 01
Monthly gross profit
100 × 0.70 = 70 ₺
Each customer leaves 70 ₺ a month.
- 02
Average lifetime
1 ÷ 0.04 = 25 months
A customer stays two years on average.
- 03
LTV
70 × 25 = 1,750 ₺
Lifetime gross profit.
- 04
LTV:CAC
1,750 ÷ 600 = ≈ 2.9
Just under the common 3 rule; room to improve.
- 05
CAC payback
600 ÷ 70 = ≈ 8.6 months
Under 12 months; cash pressure is reasonable.
In this example, cutting churn from 4% to 3% lifts lifetime to about 33 months, LTV to about 2,333 ₺ and LTV:CAC to about 3.9. A lever that looks small has a large effect at the end of the chain. This too is an example calculation.
Watch out
Common mistakes
- 01
Using revenue instead of margin
Computing LTV on revenue makes every customer look more valuable than they are. The cost of serving and keeping them sits in the margin.
- 02
Leaving things out of CAC
Counting only ad spend makes CAC look low. Sales and marketing salaries, tools and agency fees belong in it too.
- 03
Treating the average as one number
Without looking by channel, plan or cohort, a loss-making segment can hide under a very profitable one.
- 04
Booking a lifetime that hasn't happened
If a new product's churn hasn't settled, 1 ÷ churn is a bold guess. Track real retention with cohorts.
- 05
Mixing price levels in an inflationary economy
Measuring LTV at today's prices and CAC at old prices, or the reverse, skews the ratio systematically. Future revenue is not today's money; bring both sides to the same price level. The root of this is the nominal growth illusion.
Your own numbers
Calculators
Frequently asked
What is unit economics?
An analysis that compares the cost of winning and keeping a customer with the gross profit they bring over their lifetime. Its core measures are ARPU, gross margin, CAC, LTV, LTV:CAC and CAC payback.
What is a good LTV:CAC ratio?
A common rule of thumb is about 3 or higher. It is not a law: a company with high margin, low churn and plenty of cash can be comfortable with less, while a cash-tight one may need more than 3.
How many months should CAC payback be?
A frequently quoted rule of thumb is under 12 months, but that too depends on your cash position. The longer the payback, the more capital growth needs.
How do I calculate LTV?
In its simple form: ARPU × gross margin ÷ churn rate (for the same period). Use monthly ARPU with monthly churn. For new products churn hasn't settled, so read the result as an estimate.
How does inflation affect unit economics?
Revenue and costs rise at different speeds. If you measure LTV at today's prices and CAC at past prices, the ratio looks better or worse than it is. Both sides should be brought to the same price level.
Next step
Run the chain with your own numbers.
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