What is Unit Economics?

What is Unit Economics?

Unit Economics, in its simplest form, is the analysis of the revenue and cost dynamics of a single unit of a company’s product or service. In other words, it is the “micro-level profitability test” of your business model.

In summary:

• Revenue per Unit (RPU): The income earned from a single customer, subscription, or product sale.

• Cost per Unit (CPU): The cost incurred to serve/produce that customer or product.

Formula:
Unit Profit = Revenue per Unit – Cost per Unit

If the result of this equation is positive, your business model is scalable. If negative, growth actually means greater losses.

Revenue per Unit & Cost per Unit Approach

1. Revenue per Unit (RPU)

• SaaS example: A software startup charges £20 per month for a subscription.

• E-commerce example: An average customer spends £50 per purchase.

2. Cost per Unit (CPU)

• SaaS: Customer support + server costs per customer = £5

• E-commerce: Product cost + shipping + returns = £35

3. Unit Profit

• SaaS: £20 – £5 = £15

• E-commerce: £50 – £35 = £15

As shown here, two different industries may arrive at the same unit profit, but scalability, customer acquisition cost (CAC), and customer lifetime value (LTV) can paint a very different picture.

Why is Unit Economics Critical?

For Startups:

• Highlights the difference between “fast growth” and “healthy growth.”

• Proves to investors whether the business model is sustainable.

• Guides early-stage decisions on pricing and cost optimisation.

For SMEs:

• Enables measurement of profitability per customer or product line.

• Informs pricing and operational efficiency strategies.

• Exposes unnecessary costs and ensures better resource allocation.

For Investors:

Unit Economics is one of the most critical metrics for investors, as it demonstrates whether growth is truly sustainable.

In presentations, the following questions typically need to be answered:

• How much revenue does a single customer generate?

• What is the cost to acquire that customer (CAC)?

• Is the customer’s lifetime value (LTV) at least 3x the CAC?

• How is the contribution margin evolving over time?

  Golden Rule: LTV / CAC ratio ≥ 3
  (Meaning: if you spend £100 to acquire a customer, you should generate at least £300 in total value from that customer.)

Final Insight

Unit Economics is essentially the “DNA test” of your business model.

If every customer or product sale does not generate positive value, growth will not take you forward — it will simply magnify losses.

That is why Unit Economics is not just a financial calculation, but a strategic compass.