What is Unit Economics?
Definition
The direct revenues and costs associated with a single subscriber, used to determine the profitability of each customer.
Understanding Unit Economics
Unit economics answer a fundamental question: is each subscriber profitable? Key components include Customer Acquisition Cost (CAC), Lifetime Value (LTV), cost to serve (hosting, support), and the LTV:CAC ratio. A healthy subscription business has an LTV:CAC ratio of 3:1 or higher, meaning each subscriber generates at least 3x more revenue than it cost to acquire them. Understanding unit economics helps explain subscription pricing — services need to charge enough to cover acquisition costs and generate profit over the subscriber's lifetime.
Related Terms
Lifetime Value
The total revenue a business expects to earn from a single customer account over the entire duration of their subscription relationship.
Customer Acquisition Cost
The total cost of sales and marketing efforts required to acquire a new paying subscriber, calculated as total acquisition spend divided by new customers gained.
Churn Rate
The percentage of subscribers who cancel their subscription during a given time period, typically measured monthly or annually.
MRR
Monthly Recurring Revenue — the predictable total revenue a subscription business expects to earn each month from all active subscriptions.