Growth hides problems. A startup can grow fast while losing money on every customer, and then run out of cash. Unit economics tells you whether each customer, order or unit actually makes money.
The four numbers
1. Customer acquisition cost (CAC)
CAC = total sales & marketing spend ÷ new customers acquired
Spend ₹1 lakh on ads and sales salaries, win 200 customers: CAC = ₹500.
2. Contribution margin (per order or per month)
Contribution = price − variable costs (product cost, delivery, payment fees, packaging, discounts)
A ₹600 order with ₹250 product cost, ₹60 delivery, ₹12 payment fees and ₹28 packaging gives a contribution of ₹250, about 42%.
3. Lifetime value (LTV)
LTV ≈ contribution per period × number of periods a customer stays
If customers order monthly for 8 months on average: LTV ≈ ₹250 × 8 = ₹2,000. With monthly churn c, a customer stays about 1/c months on average.
4. Payback period
Payback = CAC ÷ contribution per month
CAC ₹500 ÷ ₹250 per month = 2 months to earn back what you spent to acquire them.
Rules of thumb (not laws)
- LTV:CAC of 3:1 or higher is often treated as healthy.
- Payback under 12 months keeps cash needs manageable for many businesses.
- Positive contribution margin is non-negotiable in the long run. Quick-commerce and food-delivery companies spent years working towards it.
How to improve unit economics
- Raise average order value: bundles, minimum order values, upsells.
- Increase frequency and retention: subscriptions, loyalty, better quality.
- Lower CAC: referrals, content, community, partnerships (Level 6).
- Cut variable costs: better sourcing, route density, fewer returns.
Your takeaway
Calculate these four numbers now, even with rough assumptions, and update them monthly. Scale only when they work. Next: pricing, the fastest lever you have.