Unit economics explained
Unit economics is the answer to a deceptively simple question: does each sale actually make money? A business can grow revenue fast and still be heading for the rocks if every customer loses money — growth just makes the losses bigger. Getting the unit economics right before you scale is what separates a real business from an expensive hobby.
The "unit" and contribution margin
A "unit" is whatever you sell once — a product, an order, or a customer. Start with the contribution margin: the price of one unit minus the variable costs of delivering it (materials, payment fees, shipping, support). If you sell something for £50 and it costs £20 to fulfil, your contribution margin is £30. That £30 is what's left to cover fixed costs and, eventually, profit. If the contribution margin is negative, you lose money on every single sale — no amount of volume fixes that.
CAC: what a customer costs to win
Customer Acquisition Cost (CAC) is your total sales and marketing spend divided by the number of customers it brought in. Spend £5,000 on ads and content to win 100 customers, and your CAC is £50. CAC is the price of growth — and it's the number founders most often underestimate, because it includes everything it took to get the sale, not just the ad click.
LTV: what a customer is worth
Lifetime Value (LTV) is the total contribution margin you earn from a customer over the whole relationship. If a customer brings £30 of margin per order and orders 8 times before drifting away, their LTV is around £240. For subscription businesses, LTV is the monthly margin times the average number of months a customer stays. Repeat business is where most of the value hides.
Run the numbers
Unit Economics Calculator
Enter your price, variable costs, CAC and repeat behaviour to see your contribution margin, LTV, LTV:CAC ratio and payback period.
Open the calculator →The LTV:CAC ratio
Put the two together and you get the headline health check of any business: the LTV:CAC ratio. With an LTV of £240 and a CAC of £50, that's 4.8:1 — you earn nearly five pounds for every pound spent acquiring a customer. Rough benchmarks:
Below 1:1 — you lose money on every customer. Stop and fix this before spending another penny on growth.
Around 3:1 — the widely-cited healthy target; sustainable and scalable.
Well above 3:1 (say 5:1+) — strong economics, though a very high ratio can also mean you're under-investing in growth and could afford to acquire faster.
CAC payback period
The other number that matters, especially when cash is tight, is the CAC payback period — how many months of margin it takes to earn back what you spent acquiring the customer. A £50 CAC earning £15 of margin a month pays back in just over 3 months. Shorter is better: the faster you recoup CAC, the less cash you tie up funding growth, and the more directly good unit economics connect to your runway.
Common mistakes
Counting revenue, not margin, in LTV. LTV should be built on contribution margin, not headline sales — otherwise you'll wildly overstate a customer's worth.
Lowballing CAC. Include all sales and marketing costs — salaries, tools, agency fees — not just ad spend.
Scaling before the ratio works. If LTV:CAC is under 1, growth accelerates losses. Fix the unit economics first, then pour fuel on.
Ignoring payback when cash-constrained. A great long-term LTV:CAC is little comfort if it takes 18 months to recoup CAC and you only have 6 months of runway.