Business economics
Unit economics
Work out what one subscriber is worth: contribution per month, the cost of winning them, how fast that cost is earned back, and their lifetime value.
Learning objectives
- Calculate contribution per customer per month and customer acquisition cost (CAC)
- Calculate CAC payback and explain why churn makes the real payback longer
- Calculate customer lifetime value (LTV) from contribution and churn, with and without discounting
- Judge whether growth creates value using LTV ÷ CAC and payback, and set a maximum affordable CAC
A subscription business can grow fast and still destroy money, if each new customer costs more to win than they ever pay back. Unit economics answers the question an investor, lender or CFO asks first: is one more customer worth having?
It applies the contribution idea from Revenue, costs and margins to a single customer over time. Three numbers do most of the work: what a customer contributes each month, what it cost to acquire them, and how long they stay.
m = price − variable cost per customer CAC = marketing spend ÷ new customers won Payback = CAC ÷ m Lifetime = 1 ÷ c LTV = m ÷ c Discounted LTV = m ÷ (c + d)
- m
- monthly contribution per customer: what is left after the costs that come with serving them (product, delivery, payment fees)
- CAC
- customer acquisition cost: marketing and sales spend for a period ÷ customers that spend won
- c
- monthly churn: the share of customers who cancel each month
- d
- monthly discount rate: the return the business's capital could earn elsewhere, per month
- LTV
- lifetime value: the total contribution expected from a customer while they stay
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