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Unit Economics Made Easy

Writer's picture: IdrizIdriz

One of the major determinants of whether a startup fails or succeeds is how much senior management understands the companies’ performance metrics. This is where unit economics comes in. It helps to provide a valuable picture of the financial health of a business. By analysing metrics such as customer acquisition cost, lifetime value, and unit margin, startups can understand the profitability and scalability of their products or services, making it easier to make informed decisions about pricing and scaling. It is crucial for startups to take unit economics seriously as it is a key factor in determining the long-term success of the business.

What is Unit Economics

Unit economics is a crucial concept for SaaS startups to understand and optimise. It refers to the financial performance of a single unit of a product or service, such as a single customer or subscription. By focusing on unit economics, startups can gain insight into the true profitability and scalability of their business model.

These are used to analyse the financial viability of a business model by examining the revenue and costs associated with each unit of the product or service. The focus is on the marginal cost of producing and delivering each unit, as well as the revenue generated from each unit, in order to understand the overall profitability of the business. Unit economics is an important concept in the SaaS industry, as well as in any businesses that rely on a recurring revenue model, and can help drive strategic decisions to understand the scalability of a business.

The main components of the unit of economics are CAC, LTV, GPM and Churn rate. Customer acquisition cost (CAC) is the cost of acquiring a new customer, and it includes expenses such as marketing and sales efforts. Startups need to ensure that their CAC is lower than the lifetime value (LTV) of a customer, which is the total revenue generated from a customer over the course of their lifetime with the company. If the CAC is higher than the LTV, the business will not be sustainable in the long run.


Another key aspect of unit economics is the customer churn rate. Churn rate is the percentage of customers who cancel their subscription or stop using a service. A high churn rate can have a significant impact on a startup's revenue and growth potential. To combat high churn, startups need to focus on retaining customers by providing high-quality service and continuously improving the product offering. Here is where your Customer Service Managers (CSMs) are so important.

How do I calculate and understand these metrics?

There are different ways of calculating and understanding these metrics:

Customer Lifetime Value (LTV). LTV is the total amount of revenue that a customer generates over the course of their lifetime as a customer. LTV = ARPA x Gross Margin x Customer Retention Rate

Customer acquisition cost (CAC). CAC is the amount of money that is spent to acquire a new customer. It is important to understand CAC to ensure that the business is spending the right amount of money to acquire new customers. For example, if you have spent $1,000 in acquiring one customer, that's your CAC.

Gross Profit Margin (GPM) is the difference between the revenue and cost of goods sold. It is important to track GM to understand how profitable the business is. Stronger companies tend to have

CAC Payback is a metric that measures the time it takes for a SaaS (Software as a Service) company to recoup the costs associated with acquiring a new customer. It is an investment and the quicker its recouped, the better. Its calculated as the cost of acquisition/average revenue per customer*gross profit margin. CAC payback period is expressed in months or years.

Industrial Average

Unit of economics can vary widely depending on the specific company and market. However, some general averages for these metrics are as follows:

  1. LTV: 3-5x Annual Recurring Revenue (ARR)

  2. NRR: 110-130%

  3. CAC Payback Period: 18 to 24 months

  4. Gross Profit Margin: 70-85%

It's important to note that these are just averages and may not be applicable to every SaaS startup. Additionally, these metrics can change over time, depending on the company's growth stage, target market, and other factors.

Unit economics also plays a critical role in determining a SaaS startup's ability to scale. A business model with strong unit economics can be scaled easily because the cost of acquiring new customers decreases as the customer base grows. On the other hand, a business model with weak unit economics will struggle to scale as the cost of acquiring new customers increases.

In summary, unit economics is a vital consideration for SaaS startups. By focusing on the financial performance of a single unit of a product or service, startups can gain insight into the true profitability and scalability of their business model. By optimising unit economics, startups can reduce customer acquisition costs, decrease churn rate, and increase scalability, which are all crucial to achieving long-term success.

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