Definition
Unit economics is the analysis of revenue and costs on a per-customer (or per-unit) basis to determine whether a business model generates profit as it scales. The two foundational metrics are Customer Acquisition Cost (CAC) -- what you spend to acquire one customer -- and Customer Lifetime Value (LTV) -- the total gross margin a customer generates over their lifetime.
The core question unit economics answers: does acquiring a customer create or destroy value? If your LTV is $3,000 and your CAC is $1,000, each customer generates $2,000 in value -- the model works. If LTV is $800 and CAC is $1,200, you lose $400 on every customer and can't make it up with volume. WeWork's fundamental problem was unit economics: the cost to acquire and serve each customer (including real estate, fit-out, and operations) exceeded what each customer paid over their typical membership.
The standard benchmark for healthy SaaS unit economics is an LTV:CAC ratio of 3:1 or better. This ratio was popularized by David Skok's SaaS metrics framework and has become the de facto standard used by investors, CFOs, and product teams. The ratio accounts for the time value of money -- you spend CAC upfront and receive LTV over months or years.
Why It Matters for Product Managers
PMs don't own the P&L, but every product decision affects unit economics. Building features that increase retention extends LTV. Improving onboarding reduces time to value, which reduces early churn and improves LTV. Adding self-serve capabilities reduces the need for sales-assisted acquisition, which lowers CAC. A PM who understands unit economics can articulate the financial impact of their roadmap.
Dropbox's product-led growth strategy was fundamentally a unit economics play. Their referral program (give 500MB, get 500MB) acquired users at near-zero CAC. Their freemium tier converted roughly 4% to paid at an average of $120/year. Because CAC was almost zero and LTV was $300+ for paid users, the unit economics supported massive growth even with a low conversion rate.
Contrast that with enterprise SaaS where CAC is $20K-$50K per customer (field sales, implementation, onboarding). Those companies need $60K-$150K in LTV to make the math work -- which is why enterprise products focus on reducing churn (extending LTV) and driving expansion (increasing revenue per customer). The product roadmap directly reflects the unit economics constraint.
When unit economics break down, the consequences are severe. Blue Apron spent roughly $94 to acquire each customer, but average customer lifetime was about 6 months at $250 in revenue. After COGS, CAC payback took nearly the entire customer lifetime, leaving almost no profit margin. The product couldn't retain customers long enough to justify the acquisition cost.
How It Works in Practice
Common Pitfalls
Related Concepts
CAC and LTV are the two foundational inputs to unit economics -- you can't calculate unit economics without both. Burn rate is what happens when unit economics are negative at scale: the company spends more per customer than it earns, requiring external capital to survive.