What is Unit Economics?

Unit economics answers the fundamental question: "Does this business make money on each transaction?" If unit economics are positive, scaling the business should increase profits. If negative, scaling only accelerates losses. The "unit" varies by business model: for SaaS it's usually a customer (LTV vs. CAC), for e-commerce it's an order (revenue minus COGS, shipping, and returns), for marketplaces it's a transaction (take rate minus variable costs).

The LTV:CAC ratio is the most common unit economics metric for subscription businesses. A ratio above 3:1 is generally considered healthy—each dollar spent acquiring a customer generates at least three dollars in lifetime value. The payback period (how many months until CAC is recovered) is equally important, especially for capital-constrained startups.

In case interviews, unit economics analysis is crucial for evaluating startups, new product launches, and scaling decisions. Many startups have strong top-line growth but terrible unit economics—they lose money on every customer and try to make it up on volume, which never works. Always check unit economics before recommending scale.