Unit Economics: What It Is, How to Calculate It, and Why It’s Important

Unit economics is a financial tool that shows how much a business earns from each individual "engine" of its operations. This "engine" can be anything, such as a sold cup of coffee or a course — essentially any unit that generates revenue for the company. These units are what we call "units."

Calculating unit economics

Let’s take a closer look at what unit economics is, how to calculate it, and why it's necessary.

Why is unit economics needed?

Imagine this: orders are pouring in, customers are happy, and sales are growing. But somehow, despite all this, there’s no profit. In such cases, unit economics comes to the rescue. Here’s why you should calculate it:

Firstly, it checks the viability of the business from the very start. You’ll calculate in advance how much it costs to produce one unit of product or service, forecast future profits, and develop a solid business strategy.

Secondly, unit economics helps determine the breakeven point—the sales volume at which the company stops operating at a loss. It shows how much needs to be sold to break even or start making a profit.

Thirdly, if you’re planning to open a new location or add a new service, unit economics helps you assess the risks and see whether the business will have enough funds for expansion (for instance, enough sales revenue to hire new staff).

Then, unit economics acts as a kind of “diagnostic tool.” By calculating the profit from each advertising channel, you can identify which one is more effective and allocate your marketing budget wisely.

Finally, unit economics helps eliminate “dead weight.” By identifying which products or services generate more losses than profits, a company can decide whether to remove them from the offering or develop a new sales strategy.

Advantages and disadvantages of unit economics

Like most marketing tools, this model has both pros and cons. Let’s explore them in more detail.

Disadvantages of unit economics:

• Inaccuracy: Even the most diligent employee can make mistakes, leading to distorted data.

• Time-consuming: Analyzing using unit economics often requires considering a large amount of additional data, which can be labor-intensive.

• Complex calculations: In some cases, complex formulas are used, which may be difficult for non-professionals to understand.

Advantages of unit economics:

• Shows the maximum customer acquisition cost: Imagine you spend 100 rubles to attract a customer, but they only bring you 50 rubles. Such a business likely won’t last long. Unit economics helps determine the maximum amount you can profitably spend on acquiring a customer to ensure they generate a return.

• Calculates profitability: Planning to launch a pizza delivery service or open a branch in another area? With unit economics, you can calculate whether it will pay off. It shows how many customers need to be attracted to cover all expenses and turn a profit.

• Determines the effectiveness of advertising: Not all advertising channels are equally effective. Unit economics allows you to compare how many customers come from radio ads, social media, or flyers. This helps you focus on the channels that generate the most profit.

• Makes cash flow more transparent: The unit economics model acts like an X-ray for your business. It shows where you’re making money and where you’re spending it. You might find that you’re overspending on rent or on non-selling products. The money saved can then be reinvested in business growth.

How to calculate unit economics

The following metrics are usually used for calculation:

• CPA (Cost per Action): The cost for the company when a client completes a desired action (purchase, registration, etc.).

• ARPC (Average Revenue per Customer): The amount you earn from one customer over a certain period (usually a month).

• CAC (Customer Acquisition Cost): How much money the company spends to acquire one new user.

• LTV (Customer Lifetime Value): The total amount a brand receives from a customer over their lifetime.

• ARPU (Average Revenue per User): The average amount a brand earns from one customer per week, month, or year. It is often used by subscription-based companies.

• COGS (Cost of Goods Sold): The amount spent on manufacturing, delivering, or installing the product.

• 1COGS (Additional costs for the first sale): This includes promo codes, discounts, bonuses, and other ways to attract customers.

Next, we’ll take a closer look at these metrics and how they work.

CAC

In unit economics, cohort analysis plays a key role. It shows business efficiency by focusing on the metrics of specific user groups united by a common characteristic. Calculations are made for each cohort separately.

Let’s look at an example of a fitness center wanting to analyze the effectiveness of its advertising.

• CAC cohort: Customers who signed up for a trial class for the first time during a specific month, such as March.

• CAC calculation: The total advertising budget in March is divided by the number of consumers who signed up for a trial class in March.

Example:

The fitness center's promotional expenses in March amounted to thirty thousand dollars. During this month, 150 people signed up for a trial class. Therefore, CAC = 30,000 / 150 = 200. This means the fitness center spent 200 dollars to attract one person to a trial class.

LTV

In LTV, the cohort is the time (day, month, year) when the customer made another purchase.

This metric is calculated as follows:

ARPU — the average amount a company receives from one user over a given period. It is calculated by dividing the organization's total revenue during this period by the number of users.

For example:

A music streaming service gained 500 new subscribers. The total revenue of the service was 100,000 dollars. The average revenue per user here is: 100,000 dollars / 500 users = 200.

Alternative calculation method:

Here, the abbreviation ARPC stands for Average Revenue Per Customer (the formula will be shown a bit later), and C stands for conversion rate.

The LTV formula:

Example:

A clothing store earns an average of 3,000 from a single purchase. People place an average of 2 orders per year for a period of 3 years. The LTV of a customer here is 18,000: 3,000 multiplied by 2 orders multiplied by 3 years.

After calculating LTV and CAC, they need to be compared. The resulting value will show how profitable it is to attract customers using current methods.

Example:

If CAC is 5,000 and LTV is 15,000, then their ratio is: 15,000 / 5,000 = 3. If the resulting number is greater than or equal to three, then this is an acceptable result.

ARPC, ARPU - CPA

To calculate, two additional parameters are needed:

• COGS: covers expenses related to production, delivery, and installation of the product.

• 1COGS: this category includes indirect costs related to marketing activities (e.g., promotions or bonuses).

ARPC is the average revenue that a customer brings to the organization over a certain period of time.

The ARPC calculation formula:

Average check is the average amount that customers spend at a point of sale. To learn how to calculate and increase it, read the article "Average Order Value: What It Is, How to Calculate It, and Why It’s Important."

Example: You opened a café called "Croissant." The average check is 800. Most people buy two croissants. The cost of one is 200. Consumers visit your café three times each month, and on their first visit, you give them a cookie as a bonus (which costs you 150).

Thus, the revenue per customer in your café will be 2,100.

800 - 400 (cost of two items) = 400.

400 * 3 - 150 (cost of the bonus cookie) = 1,050. This is the amount a guest brings to the "Croissant" café per month.

Next, we'll deal with ARPU - CPA.

ARPU minus CPA reflects the average revenue generated from one person, excluding the costs of acquiring them. To perform these calculations, you need to determine how much it costs to attract one person.

For example, if an organization spent 50,000 on marketing and attracted 200 people, its CPA is 250 per person. Suppose the revenue from one user is 400. After deducting marketing costs (250), the company actually earns only 150 from the sale.

What not to do when calculating

Below are the three most common mistakes when calculating unit economics.

1. You ignore marketing expenses. It's essential to account for all costs associated with acquiring a customer. Otherwise, you might overlook a situation where the business is actually unprofitable.

Example: A fast-food delivery service calculated that a person orders 1,000 rubles worth of food per month. The customer made three orders, so the unit brought in 3,000 rubles. However, the company did not account for the cost of acquiring that customer. As a result, the real cost of acquisition may exceed 3,000 rubles, and the service operates at a loss.

2. You don’t break down units by channels and periods. The effectiveness of customer acquisition can vary significantly depending on the channel. You need to calculate unit economics for each channel separately.

Example: A clothing store launched ads on VK and Odnoklassniki. The ad on VK brought in 100 orders, while the ad on Odnoklassniki brought in 30 with the same budget. If you calculate unit economics across all channels together, the store won't see that VK ads are much more effective.

3. You incorrectly account for products. You shouldn't calculate unit economics based on all purchased inventory; only sold products should be considered. Otherwise, you'll get an inflated LTV figure.

Example: Suppose a clothing store purchased 100 t-shirts at 500 rubles each but sold only 80. If you include all units in the calculation of unit economics, you'll get a distorted LTV value.

Where to calculate unit economics

If you don’t have time to deal with formulas, you can use ready-made calculators. Here are a few examples:

ueCalc is a unit economics calculator that shows how much money your business generates. It takes into account how many customers you have, how much you spend on advertising, how often they make repeat purchases, and much more. With ueCalc, you can even "look into the future" and see how much money your business will generate in a month, a year, or even 100 years.

uptiq.app is another simple calculator. No registration is required for calculations — just enter your data. The interface is in English.

Jet.style is a free tool that provides insight into how much money each new customer brings, taking into account acquisition costs and average revenue per customer.

likestats is a convenient calculator for calculating unit economics for businesses on Wildberries. There’s a video tutorial available. It shows the optimal selling price and the unit's margin.

Conclusion

Unit economics is the key to understanding your business's efficiency. It reveals how much you earn and spend on each customer. Analyzing unit economics helps identify weak points, optimize expenses, and ultimately increase profits. Don’t neglect this important tool—manage your business based on accurate data.