Master unit economics for SaaS, services, e-commerce, and agencies. Calculate LTV, CAC, and margins to build a profitable business model.
Unit Economics by Business Model: Complete Guide
Unit economics determine whether your business can be profitable at scale. You can have amazing growth, but if your unit economics don't work, you're building a house on sand.
This guide breaks down unit economics for four major business models: SaaS, professional services, e-commerce, and agencies. You'll learn what to measure, how to calculate key metrics, and what benchmarks to aim for.
What Are Unit Economics?
Unit economics measure the direct revenues and costs associated with a single unit of your business model. That unit might be:
- A customer (SaaS)
- A project or engagement (services)
- A product sale (e-commerce)
- A client or campaign (agency)
The core question: Does each unit generate more value than it costs to acquire and serve?
Why Unit Economics Matter
They reveal true profitability. Vanity metrics like revenue growth or user acquisition hide whether you're actually making money on each transaction.
They predict scalability. If your unit economics are negative, scaling just means losing more money faster.
They guide decision-making. Unit economics tell you where to invest, what to optimize, and when to change course.
Core Metrics Across All Models
Before diving into specific business models, understand these fundamental metrics:
Customer Acquisition Cost (CAC)
Total sales and marketing expenses divided by number of new customers acquired in that period.
CAC = (Sales + Marketing Costs) / New Customers Acquired
Include salaries, advertising, tools, agencies, events, and all customer acquisition activities.
Lifetime Value (LTV)
The total gross profit you expect from a customer over their entire relationship with your business.
LTV = Average Revenue Per Customer × Gross Margin % × Average Customer Lifespan
Or for subscription models:
LTV = ARPU × Gross Margin % / Churn Rate
LTV:CAC Ratio
The golden ratio that determines business viability.
LTV:CAC = Customer Lifetime Value / Customer Acquisition Cost
Benchmarks:
- Below 1:1 - Unsustainable, losing money on every customer
- 1:1 to 2:1 - Struggling, little room for profit
- 3:1 to 5:1 - Healthy, sustainable growth
- Above 5:1 - Either exceptional efficiency or underinvesting in growth
Payback Period
How long it takes to recover your customer acquisition cost.
Payback Period = CAC / (Monthly Recurring Revenue × Gross Margin %)
Benchmark: Under 12 months is healthy for most models. Over 18 months creates cash flow stress.
Unit Economics for SaaS
SaaS businesses have the most straightforward unit economics because of recurring revenue and digital delivery.
Key Metrics
Monthly Recurring Revenue (MRR)
Your predictable monthly revenue from subscriptions.
MRR = Number of Customers × Average Revenue Per User (ARPU)
Track new MRR, expansion MRR, contraction MRR, and churned MRR separately.
Annual Recurring Revenue (ARR)
ARR = MRR × 12
Use ARR for annual contracts or when discussing company valuation.
Churn Rate
The percentage of customers who cancel each month.
Monthly Churn Rate = Customers Lost This Month / Customers at Start of Month
Revenue Churn:
Revenue Churn = MRR Lost This Month / MRR at Start of Month
Revenue churn matters more than customer churn. Losing a $10,000/month customer hurts more than losing ten $10/month customers.
Net Revenue Retention (NRR)
NRR = (Starting MRR + Expansion - Contraction - Churn) / Starting MRR
If NRR exceeds 100%, your existing customers are growing in value faster than you're losing revenue to churn. This is the holy grail of SaaS economics.
SaaS Unit Economics Calculation
Let's work through a complete example:
Company: Project management SaaS
Pricing: $49/month per user, average 8 users per account = $392/month ARPU
Sales & Marketing: $50,000/month total spend
New Customers: 25 per month
Churn Rate: 3% monthly (2.5% customer churn + 0.5% expansion)
Gross Margin: 85% (typical for SaaS)
Calculate CAC:
CAC = $50,000 / 25 = $2,000 per customer
Calculate Customer Lifetime:
Average Lifetime = 1 / Churn Rate = 1 / 0.03 = 33 months
Calculate LTV:
LTV = $392 × 85% × 33 months = $10,996
LTV:CAC Ratio:
LTV:CAC = $10,996 / $2,000 = 5.5:1
Payback Period:
Payback = $2,000 / ($392 × 85%) = 6 months
Analysis: This is excellent unit economics. 5.5:1 LTV:CAC and 6-month payback means this business can aggressively invest in growth.
SaaS Benchmarks
- LTV:CAC Ratio: 3:1 to 5:1
- Payback Period: 6-12 months
- Gross Margin: 75-90%
- Monthly Churn: 2-5% for SMB, under 1% for enterprise
- Net Revenue Retention: 100-120% (world-class >120%)
- CAC as % of LTV: 20-33%
Optimizing SaaS Unit Economics
Reduce churn: Every 1% reduction in churn dramatically increases LTV. Focus on onboarding, engagement, and value realization.
Expand existing accounts: Easier and cheaper than acquiring new customers. Add seats, features, or products.
Improve payback period: Faster payback means less cash required to fuel growth. Annual contracts paid upfront accelerate this.
Segment by plan tier: Your enterprise customers likely have 10x better unit economics than your starter plan customers.
Unit Economics for Professional Services
Services businesses measure unit economics per project, engagement, or billable hour.
Key Metrics
Billable Utilization
Percentage of total work hours that are billed to clients.
Utilization = Billable Hours / Total Available Hours
Benchmark: 60-75% for healthy services businesses. Higher risks burnout, lower means inefficiency.
Effective Hourly Rate
Total project revenue divided by hours invested.
Effective Rate = Project Revenue / Total Hours (Including Non-Billable)
This reveals true profitability better than your stated hourly rate.
Revenue Per Employee
Revenue Per Employee = Annual Revenue / Number of Employees
Benchmark: $150,000-$250,000 for most professional services firms.
Gross Margin Per Project
Gross Margin = (Project Revenue - Direct Costs) / Project Revenue
Direct costs include contractor fees, software, tools, and any project-specific expenses.
Services Unit Economics Calculation
Company: Operations consulting firm
Average Project: $35,000
Project Delivery Hours: 120 hours (3 weeks at 40 hours/week)
Hourly Rate Equivalent: $291/hour ($35,000 / 120)
Direct Costs: $5,000 (software, contractors, tools)
Sales & Marketing Cost Per Client: $4,000
Client Acquisition Rate: 8 clients per quarter
Client Lifetime: 3 projects over 18 months
Calculate Gross Margin Per Project:
Gross Margin = ($35,000 - $5,000) / $35,000 = 85.7%
Calculate CAC:
CAC = $4,000 (direct acquisition cost per signed client)
Calculate LTV:
LTV = (3 projects × $30,000 gross profit) = $90,000
LTV:CAC Ratio:
LTV:CAC = $90,000 / $4,000 = 22.5:1
Analysis: Exceptional unit economics driven by high retention and repeat projects. The challenge is capacity-constrained growth.
Services Benchmarks
- Gross Margin: 40-60% (labor-intensive) to 70-85% (high-expertise)
- Utilization Rate: 60-75%
- Revenue Per Employee: $150,000-$250,000
- LTV:CAC Ratio: 5:1 to 15:1
- Project Profitability: 30-50% net margin
Optimizing Services Unit Economics
Productize services: Create standardized offerings with predictable scoping and delivery. Reduces variability and increases margins.
Value-based pricing: Charge based on outcomes rather than hours. Decouples revenue from time.
Increase repeat revenue: Retainers and ongoing engagements improve LTV and reduce CAC burden.
Optimize team leverage: Partner-to-associate ratios determine scalability. Can senior people supervise more junior team members?
Track actual vs. estimated hours: Scope creep kills margins. Measure estimation accuracy by project type.
Unit Economics for E-commerce
E-commerce unit economics center on product margins, repeat purchase behavior, and fulfillment costs.
Key Metrics
Average Order Value (AOV)
AOV = Total Revenue / Number of Orders
Contribution Margin
Revenue minus variable costs (COGS, payment processing, shipping, fulfillment).
Contribution Margin = Revenue - COGS - Payment Fees - Shipping - Fulfillment
This is your true unit-level profitability.
Repeat Purchase Rate
Repeat Purchase Rate = Customers Who Purchased 2+ Times / Total Customers
Purchase Frequency
Purchase Frequency = Total Orders / Unique Customers (in time period)
Customer Lifetime Value
LTV = AOV × Gross Margin × Purchase Frequency × Customer Lifespan
E-commerce Unit Economics Calculation
Company: Subscription coffee company
Average Order Value: $45
COGS: $18 (coffee, packaging)
Shipping: $5
Payment Processing: $1.50 (3.3% of $45)
CAC: $30 (Facebook ads, influencers)
Purchase Frequency: 6 orders per year
Average Customer Lifespan: 18 months
Customer LTV Calculation:
First, calculate contribution margin per order:
Contribution Margin = $45 - $18 - $5 - $1.50 = $20.50
Contribution Margin % = $20.50 / $45 = 45.6%
Then calculate total orders:
Total Orders = 6 per year × 1.5 years = 9 orders
LTV = $20.50 × 9 orders = $184.50
LTV:CAC Ratio:
LTV:CAC = $184.50 / $30 = 6.15:1
Payback Period:
Orders to Payback = $30 / $20.50 = 1.46 orders (about 3 months)
Analysis: Strong unit economics with fast payback. The subscription model drives repeat purchases that make customer acquisition profitable.
E-commerce Benchmarks
- Contribution Margin: 30-60% depending on product category
- LTV:CAC Ratio: 3:1 to 5:1
- Repeat Purchase Rate: 25-40% for healthy brands
- Payback Period: 3-6 months
- AOV Growth: Should increase over customer lifetime
Optimizing E-commerce Unit Economics
Increase AOV: Bundles, upsells, minimum order thresholds for free shipping.
Reduce COGS: Negotiate with suppliers, optimize packaging, improve inventory management.
Drive repeat purchases: Email marketing, subscriptions, loyalty programs cost far less than new customer acquisition.
Optimize shipping: Negotiate carrier rates, adjust fulfillment locations, set smart free shipping thresholds.
Product mix matters: Analyze unit economics by product. Some products are customer acquisition tools (low margin) while others drive profitability.
Unit Economics for Agencies
Agency economics combine elements of services and e-commerce, with retainer vs. project mix affecting calculations.
Key Metrics
Monthly Retainer Revenue (MRR)
Same concept as SaaS. Your predictable monthly revenue from ongoing clients.
Client Lifetime Value
LTV = (Average Monthly Retainer × Gross Margin %) × Average Client Tenure (months)
Or for project-based:
LTV = Average Project Value × Gross Margin % × Number of Projects Per Client
Client Acquisition Cost
Total business development costs divided by new clients signed.
CAC = (Sales + Marketing + BD Costs) / New Clients Signed
Gross Margin Per Client
Gross Margin = (Client Revenue - Direct Labor - Contractor Costs) / Client Revenue
Agency Unit Economics Calculation
Company: Digital marketing agency
Average Client Retainer: $8,000/month
Client Tenure: 14 months average
New Clients Per Quarter: 5
Sales & Marketing Costs: $15,000/quarter
Gross Margin: 55% (after team costs, contractors, tools)
Calculate CAC:
CAC = $15,000 / 5 clients = $3,000
Calculate LTV:
LTV = ($8,000 × 55%) × 14 months = $61,600
LTV:CAC Ratio:
LTV:CAC = $61,600 / $3,000 = 20.5:1
Payback Period:
Payback = $3,000 / ($8,000 × 55%) = 0.68 months
Analysis: Excellent unit economics typical of agencies with strong referral networks and low acquisition costs. The challenge is often capacity and talent retention, not customer economics.
Agency Benchmarks
- Gross Margin: 50-65%
- LTV:CAC Ratio: 5:1 to 20:1 (wide range based on acquisition channel)
- Client Tenure: 12-24 months
- Retainer vs. Project Mix: 60-80% retainer revenue is ideal
- Revenue Per Employee: $100,000-$200,000
Optimizing Agency Unit Economics
Shift to retainers: Retainer revenue improves LTV, reduces revenue volatility, and makes forecasting possible.
Productize offerings: Standardized service packages reduce delivery variability and improve margins.
Increase contract values: Expanding scope with existing clients is cheaper than acquiring new ones.
Reduce client churn: Every additional month of retention dramatically improves LTV.
Optimize acquisition channels: Referrals typically have 10x better CAC than cold outbound.
Unit Economics Red Flags
Watch for these warning signs across any business model:
Worsening LTV:CAC Over Time
If your ratio is declining quarter over quarter, you're losing efficiency. Either acquisition is getting more expensive or customer value is dropping.
Action: Analyze CAC by channel and cohort LTV by acquisition period. Find what changed.
Extended Payback Periods
If payback is extending beyond 12-18 months, you'll face cash flow stress and can't reinvest acquisition revenue into growth.
Action: Improve retention, increase prices, or reduce acquisition costs.
Negative Contribution Margin
If you're not covering variable costs on a per-unit basis, you're in trouble.
Action: Raise prices, reduce costs, or change your model. You cannot make this up on volume.
High Variability
If your metrics swing wildly month to month, you don't have a repeatable business model yet.
Action: Standardize processes, improve forecasting, segment cohorts to find patterns.
Ignoring Fully-Loaded Costs
Don't calculate CAC using only ad spend while ignoring sales team salaries, tools, and overhead.
Action: Include all true costs. Better to know the real numbers than operate on false assumptions.
Improving Your Unit Economics
Price Optimization
Most businesses are underpriced. A 10% price increase falls straight to the bottom line if churn remains constant.
Test pricing tiers, grandfathering, and value-based packaging.
Cost Reduction
Audit every line item in your cost structure. Can you negotiate better terms? Eliminate waste? Automate expensive manual processes?
Segmentation
Not all customers have equal unit economics. Your enterprise customers likely have 5-10x better economics than your small customers.
Measure separately and invest resources accordingly.
Retention Focus
A 5% improvement in retention can double profitability over time. Retention is often the highest-leverage improvement area.
Operational Excellence
Improving delivery efficiency, reducing refunds, optimizing fulfillment—all directly impact unit economics.
Tracking and Reporting
Monthly Dashboards
Track these metrics monthly by cohort:
- New customer acquisition and CAC
- LTV by acquisition month
- Churn/retention rates
- Payback period trends
- LTV:CAC ratio
Cohort Analysis
Group customers by acquisition month and track their behavior over time. This reveals:
- Whether newer customers have better/worse economics
- How retention changes over customer lifetime
- Impact of product or pricing changes
- Seasonality patterns
Scenario Modeling
Model how changes affect profitability:
- "If we increase price 15%, what churn rate can we tolerate?"
- "If CAC increases 25%, what does LTV need to be?"
- "What retention rate do we need to hit 4:1 LTV:CAC?"
Conclusion
Unit economics are the foundation of business sustainability. You can have explosive growth, but if your unit economics don't work, you're just accelerating toward a cliff.
The specific metrics vary by business model, but the principle is universal: each customer, project, or transaction must generate more value than it costs to acquire and serve.
Start measuring today. Calculate your LTV and CAC. Analyze your ratios. Find your weak points.
Then systematically improve them. Better unit economics create more profitable growth, better cash flow, and a more valuable business.
If you need help analyzing your unit economics or building financial operations that track what matters, Cedar Operations specializes in implementing CFO-level finance practices for growing businesses. Let's talk.
FAQ
What's the difference between gross margin and contribution margin?
Gross margin typically includes only direct product/service costs. Contribution margin subtracts all variable costs including shipping, payment processing, and fulfillment. Contribution margin better reflects true unit-level profitability.
How often should I recalculate unit economics?
Monthly at minimum. Weekly for fast-growing businesses or during major changes like pricing tests or new acquisition channels.
What if my LTV:CAC ratio is below 3:1?
You're spending too much to acquire customers relative to their value. Either reduce CAC (cheaper acquisition channels, improve conversion) or increase LTV (reduce churn, increase prices, drive expansion revenue).
Should I include overhead in CAC?
For true fully-loaded CAC, yes—include a portion of overhead like office space, tools, and management salaries attributable to sales and marketing. This gives you real per-customer costs.
How do I handle one-time vs. recurring revenue in LTV?
Calculate separately. One-time revenue has no expansion or retention component. Recurring revenue uses churn rates to project lifetime. If you have both, sum them for total LTV.
What's more important—improving LTV or reducing CAC?
Both matter, but improving LTV (through retention and expansion) typically has higher leverage than optimizing CAC. A 20% improvement in retention often doubles LTV.
Can unit economics be too good?
Yes. If your LTV:CAC is above 8:1 or 10:1, you might be under-investing in growth. You could profitably spend more on customer acquisition and scale faster.
How do I calculate LTV for a new business without historical data?
Use industry benchmarks and make conservative assumptions. Project churn at the high end of your category's range. Refine as you collect real data. Better to be pessimistic early than overlook problems.
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