Unit Economics

Unit economics measures the profitability of a single "unit" of your business: typically one customer, one transaction, or one product sold. For SaaS companies, unit economics is primarily the LTV:CAC ratio and payback period. For marketplaces, it might be contribution margin per transaction. The fundamental question is: does the company make money on each incremental unit?

Unit economics is arguably the most important metric category for startups because it determines whether growth creates or destroys value. A company with strong unit economics can grow profitably: each new customer adds more value than it costs. A company with negative unit economics loses more money the faster it grows, a trap that has killed many well-funded startups.

Investors expect negative unit economics in the earliest stages (when fixed costs are spread over few customers), but they want to see a credible path to positive unit economics at scale. This usually means showing that CAC will decrease (through brand awareness and word-of-mouth), churn will improve (as the product matures), and ARPU will increase (through upsells and pricing power). Companies that cannot articulate this path will struggle to raise follow-on funding.