Unit Economics
The direct revenues and costs associated with a single unit of a business, used to assess per-transaction profitability and scalability.
What is Unit Economics?
Unit economics is the analysis of a business's profitability at the level of a single unit — which might be one customer, one transaction, one subscription, or one delivery, depending on the business model. The key metrics are revenue per unit, variable costs per unit, and contribution margin per unit. When unit economics are positive (revenue per unit exceeds variable costs), the business theoretically becomes more profitable as it scales; when they are negative, growth accelerates losses. Investors in growth companies scrutinize unit economics closely, particularly the ratio of Customer Lifetime Value (LTV) to Customer Acquisition Cost (CAC). A healthy SaaS business typically targets LTV-to-CAC of 3:1 or better. Negative unit economics can be temporarily acceptable if they improve with scale, but companies that grow while losing money on each transaction rarely find profitability at scale.
Example
A meal-kit delivery company charges $60 per order (revenue per unit). Direct costs per box — ingredients ($22), packaging ($4), labor ($8), delivery ($12) — total $46. Contribution margin per box = $14. But customer acquisition cost (digital ads, promotions) averages $120 per customer, and average customers order only 6 boxes before canceling. LTV = 6 × $14 = $84. LTV/CAC = $84/$120 = 0.7x — deeply negative unit economics that explain why most meal-kit companies struggled to survive without constant fundraising.
Source: Damodaran Online — Valuation of High-Growth Companies