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Unit Economics
Definition
Unit economics measures the direct revenues and costs associated with a single unit of a business, typically a customer or product sold.
Explanation
Key unit economics metrics include Customer Acquisition Cost (CAC), Lifetime Value (LTV), and contribution margin per unit. A healthy business has LTV significantly higher than CAC (typically 3:1 or greater). Unit economics analysis helps determine if a business model is sustainable.
Understanding unit economics is critical for startups seeking investment. Investors want to see that each customer generates more value than it costs to acquire them.
Example
A subscription service spending $200 to acquire a customer (CAC) with a $50/month subscription lasting 24 months (LTV of $1,200) has a strong 6:1 LTV/CAC ratio.