How to work out unit economics and margins, and act on them.

Unit economics look at the business one customer (or one order, or one seat) at a time: what it costs to acquire, what it pays, what it costs to serve and how long it stays. If the unit makes money, growth creates value. If it does not, more customers deepen the hole. This is why tech founders should understand their unit economics before spending heavily on growth, and why investors ask about them early.

The core numbers

• Gross margin: revenue minus the direct cost of delivering it (hosting, third-party services, payment fees, support and onboarding effort), as a percentage of revenue.
• Contribution margin: what is left after all variable costs, including variable sales and marketing costs.
• Customer acquisition cost (CAC): total sales and marketing spend in a period divided by new customers won in that period. Include salaries, not just advertising.
• Lifetime value (LTV): average monthly revenue per customer, times gross margin, divided by monthly churn.
• CAC payback period: CAC divided by monthly gross profit per customer. It shows how many months of cash you must fund before a customer pays back.

Step by step

1. Get the cost of sales split right in your books, so gross margin is real. See the guide on the monthly close.
2. Calculate gross margin overall and, if you can, by product or customer segment.
3. Calculate fully loaded CAC by channel for the last six months.
4. Measure churn from cohorts, not guesses. Early on, use a cautious assumption until you have data.
5. Calculate LTV, LTV to CAC and payback with the unit economics calculator.
6. Compare segments. Small customers and large customers often have very different economics. So do channels.
7. Decide what to change: price, packaging, onboarding cost, target segment or channel mix.

Rules of thumb

These are widely used rules of thumb for subscription software, not laws. Software businesses often aim for gross margins well above 70 percent once they reach scale. An LTV to CAC ratio of around 3 to 1 is commonly treated as healthy, and a CAC payback under 12 months is commonly treated as good for small and mid-sized B2B customers. Services-heavy and hardware businesses run lower margins and need different benchmarks. More important than any benchmark is the trend: are your numbers getting better each quarter?

Worked example

Parcelwise is a fictional Glasgow tech startup selling delivery tracking software to independent online retailers. Headline numbers looked fine: average revenue £150 a month, gross margin 72 percent, CAC £1,200. Splitting by segment changed the picture. Small retailers paid £60 a month, churned at five percent a month and needed as much onboarding as larger ones; their CAC payback was over two years. Mid-sized retailers paid £400 a month, churned at one percent and paid back CAC in under six months.

Parcelwise introduced a self-serve onboarding route for small retailers, raised the entry price and pointed its outbound sales only at mid-sized retailers. Blended CAC payback fell to under a year within two quarters.

Common mistakes

• Excluding salaries from CAC and so understating it.
• Leaving onboarding and support out of cost of sales.
• Using an early, very low churn rate that produces an unrealistic LTV.
• Looking only at blended averages, which hide unprofitable segments.
• Discounting heavily to win customers and never checking the effect on payback.

What to measure

• Gross margin monthly, overall and by segment.
• CAC and CAC payback by channel.
• LTV to CAC ratio.
• Net revenue retention and churn by cohort. The SaaS metrics dashboard brings these together.

Pricing is the most powerful lever on unit economics; the pricing and plans calculator and the sales playbook go further.