Unit Economics¶

Unit economics is an economic modeling method for determining business profitability by evaluating profitability per unit of goods or per single customer. It applies when launching startups, planning to scale, pitching to investors, or when user acquisition and advertising are the main cost drivers.

Key Facts¶

Core formula: Profit = Revenue - Variable Costs - Fixed Costs
Business is viable when Gross Profit > Fixed Costs
Gross Profit is King - the primary metric for unit economics
Higher cost-per-lead doesn't mean worse economics - lead quality (conversion to deal) matters more than quantity
Contribution margin (Revenue minus variable costs per unit) must be positive before scaling

Core Formulas¶

Profit (Margin) = Gross Profit - Fixed Costs
Gross Profit = Revenue - Variable Costs

Main Unit Economics Formula:
User Acquisition x (ARPU - CPA) = Gross Profit

Where:
ARPU = C1 x APC x AvP x Margin

Expanded:
User Acquisition x (C1 x APC x AvP x Margin - CPA) = Gross Profit

Payback Period = CPA / (Monthly ARPU x Margin)

Patterns¶

Key Metrics¶

Metric	Definition
CPA/CAC	Cost Per Acquisition / Customer Acquisition Cost
ARPU	Average Revenue Per User
GMV	Gross Merchandise Value - total volume before expenses
LTV	Lifetime Value - total revenue from customer over lifetime
ROMI	Return on Marketing Investment
C1	Conversion to first purchase (% of users)
APC	Average Payment Count (repeat purchases)
AvP	Average Price per transaction
COGS	Cost of Goods Sold - direct cost per transaction
ROAS	Return On Ad Spend = Revenue / Ad Spend
ROI	Return on Investment = (Revenue - Cost) / Cost

Marketing Cost Metrics¶

Metric	Formula
CPI	Cost Per Install = Ad Spend / Installs
CPC	Cost Per Click = Ad Spend / Clicks
CPM	Cost Per Mille = Cost per 1,000 impressions
CTR	Click-Through Rate = Clicks / Impressions
CVR	Conversion Rate = Actions / Clicks

Growth Levers (Goldratt Theory of Constraints)¶

Find the parameter whose change gives the greatest contribution to Gross Profit
Subordinate the product to this parameter (focus on it)
Expand/scale it

Possible decisions based on metrics: - Attract more users (increase User Acquisition) - Reduce acquisition cost (reduce CPA) - Increase conversion to purchase (increase C1) - Increase average order value (increase AvP) - Increase repeat purchase count (increase APC) - Increase GMV

RFM Segmentation (DAX Example)¶

RFM = Recency, Frequency, Monetary - customer segmentation model:

Recency = DATEDIFF(MAX(Orders[OrderDate]), TODAY(), DAY)
Frequency = COUNT(Orders[OrderID])
Monetary = SUM(Orders[Revenue])

Rank customers 1-5 on each dimension, combine into RFM score for targeting.

Gotchas¶

A cheap acquisition channel with low-quality users is worse than an expensive channel with high-LTV users - always analyze cohort behavior by acquisition source
ARPU averaged across all users can mask bimodal distributions (whales vs free users)
Payback period is critical for subscription models - if payback > average user lifetime, the model doesn't work
Unit economics calculated at launch may not hold at scale due to market saturation and rising acquisition costs