Unit economics

Unit Economics

Calculate and analyze CAC, LTV, payback period, contribution margin, and break-even for any business model. Turn raw numbers into decisions.

Purpose

Unit economics tell you whether your business model actually works — not in theory, but per customer, per transaction. This skill takes the user's numbers and produces a clear picture of profitability, sustainability, and where to focus.

Workflow

Step 1: Identify Business Model

Ask the user:

• Model type: SaaS, e-commerce, marketplace, services, CPG, other
• Revenue model: Subscription, one-time purchase, usage-based, hybrid
• Current stage: Pre-revenue, early, growth, mature

Step 2: Gather the Numbers

Based on model type, collect:

For SaaS / Subscription:

• Monthly revenue per customer (ARPU)
• Monthly churn rate (%)
• Customer acquisition cost (CAC) — or marketing spend + sales spend / new customers
• Gross margin (%)

For E-commerce / CPG:

• Average order value (AOV)
• Purchase frequency (orders per year)
• Cost of goods sold (COGS) per unit
• Customer acquisition cost
• Repeat purchase rate

For Services:

• Average contract value
• Gross margin on delivery
• Sales cycle length
• Customer acquisition cost
• Retention / renewal rate

If the user doesn't have exact numbers, help them estimate from what they do know.

Step 3: Calculate Core Metrics

Customer Acquisition Cost (CAC)

CAC = Total Sales & Marketing Spend / New Customers Acquired

Lifetime Value (LTV)

• SaaS: LTV = ARPU x Gross Margin / Monthly Churn Rate
• E-commerce: LTV = AOV x Purchase Frequency x Avg Customer Lifespan x Gross Margin
• Services: LTV = Avg Contract Value x Gross Margin x Avg Renewals

LTV:CAC Ratio

LTV:CAC = LTV / CAC

• Below 1:1 = Losing money on every customer
• 1:1 to 3:1 = Unsustainable or early stage
• 3:1 to 5:1 = Healthy
• Above 5:1 = Under-investing in growth (or CAC will rise)

Payback Period

Payback Period = CAC / (ARPU x Gross Margin)

• Under 6 months = excellent
• 6-12 months = healthy
• 12-18 months = needs monitoring
• 18+ months = cash flow problem

Contribution Margin

Contribution Margin = (Revenue - Variable Costs) / Revenue

Break-even Point

Break-even = Fixed Costs / Contribution Margin per Unit

Step 4: Analyze and Interpret

For each metric, provide:

• The calculated number
• What it means in plain language
• How it compares to benchmarks for their business type
• What lever to pull to improve it

Step 5: Scenario Modeling

Show impact of changes:

• "If you reduce churn by 2%, LTV increases by $X"
• "If you increase AOV by 15%, payback period drops to X months"
• "If you cut CAC by 20% (through organic channels), LTV:CAC hits X:1"

Step 6: Recommendations

Based on the numbers, recommend:

1. The single biggest lever for profitability
2. Warning signs (if any)
3. What to track monthly

Output Format

## Unit Economics: [Business Name / Product]

### Key Metrics
| Metric | Value | Benchmark | Status |
|--------|-------|-----------|--------|
| CAC | $XX | $XX-XX | [healthy/warning/critical] |
| LTV | $XX | $XX-XX | [healthy/warning/critical] |
| LTV:CAC | X:1 | 3:1-5:1 | [healthy/warning/critical] |
| Payback Period | X months | <12 mo | [healthy/warning/critical] |
| Contribution Margin | XX% | XX-XX% | [healthy/warning/critical] |
| Monthly Churn | X% | X-X% | [healthy/warning/critical] |

### Calculations
[Show the math for each metric]

### Scenario Analysis
| Change | Impact on LTV | Impact on LTV:CAC |
|--------|--------------|-------------------|
| [Scenario 1] | +$XX | X:1 → X:1 |
| [Scenario 2] | +$XX | X:1 → X:1 |

### Recommendations
1. **Biggest lever:** [What to focus on]
2. **Warning:** [If applicable]
3. **Track monthly:** [Key metrics to watch]

Constraints

• Always show the math — don't just give a number without the calculation
• Label assumptions clearly — "Assuming 5% monthly churn" not just "LTV = $2,400"
• Use industry benchmarks but note they vary widely
• Don't give false precision — if inputs are estimates, outputs are estimates too
• Flag when the user doesn't have enough data for reliable calculations
• Never present unit economics as a guarantee of business viability