How to Build a Simple Unit Economics Model

Build a unit economics model to track profit per customer and identify which parts of your business actually make money.

1. Define your unit and time frame. Pick the unit you sell to: individual customers, accounts, or transactions. Set a measurement period — monthly for subscription businesses, 12-24 months for one-time purchases. If you have multiple customer segments or product lines, build separate models for each.
2. Calculate customer acquisition cost (CAC). Add total sales and marketing spend for the period, then divide by new customers acquired. Include salaries, ad spend, events, tools, and commissions. If you spend $50,000 on sales and marketing to acquire 100 customers, your CAC is $500.
3. Track average revenue per unit (ARPU). Divide total revenue by number of active customers in your time frame. For subscription businesses, use monthly recurring revenue divided by active subscribers. For transaction businesses, multiply average order value by purchase frequency over your measurement period.
4. Calculate contribution margin per unit. Subtract direct costs from ARPU to get contribution margin. Include cost of goods sold, payment processing fees, shipping, and variable labor directly tied to fulfillment. Fixed costs like rent and salaries stay out of this calculation.
5. Compute customer lifetime value (LTV). Multiply contribution margin by customer lifespan in periods. If customers stay 20 months on average with $50 monthly contribution margin, LTV equals $1,000. For transaction businesses, multiply by expected number of purchases over the customer relationship.
6. Test the LTV-to-CAC ratio. Divide LTV by CAC to check unit profitability. Ratios below 1.0 lose money on every customer. Ratios between 1.0-3.0 may be breakeven or slightly profitable. Sustainable businesses typically need 3.0 or higher, with payback periods under 12 months.