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Glossary
Unit economics
Unit economics are the revenues and costs associated with a single unit of business — typically a customer, subscriber, cohort, order, or other repeatable unit — used to judge whether growth creates value after relevant variable costs and, over time, after acquisition investment. The unit and analysis horizon must be stated; there is no single universal formula.
Why it matters
Top-line growth can hide structural losses. Unit economics ask whether each incremental unit contributes positively once relevant variable costs are covered, and whether acquisition spend can be recovered on a sensible horizon. The “unit” must be chosen carefully and held consistent across contribution, CAC, and CLV comparisons: per-seat, per-account, per-order, and per-marketplace-side metrics answer different questions.
Relevant costs depend on that unit and horizon. Not every cost labeled COGS in financial statements is variable for the decision at hand, and some variable costs sit outside COGS. Unit economics do not replace full P&L, cash planning, or competitive strategy — and they can look healthy while the firm still fails on fixed costs or capital intensity.
Example (enterprise): A SaaS team defines the unit as a paying account cohort, tracks contribution margin after hosting and variable support for that cohort, then compares contribution to cohort-aligned CAC and expected lifetime — rejecting expansion of segments that never recover CAC even if ARR rises.
Mechanisms
- Unit and cohort definition — choose the decision-relevant unit and keep it consistent across metrics.
- Relevant-cost contribution — revenue minus variable costs that change with the unit over the analysis horizon.
- Acquisition and lifetime bridge — relate contribution to CAC, retention, expansion, and payback over time.
Boundaries
- Unit economics ≠ company profitability by themselves (fixed costs and overhead still matter).
- Unit economics ≠ a single magic ratio; formulas depend on the unit, horizon, and accounting choices.
- COGS labels ≠ automatic variable-cost classification for every unit decision.
- Healthy early-unit metrics can still fail if retention assumptions or cost attribution are wrong.
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