Welcome to the ultimate business test! Unit economics reveal whether your business model actually works. This simple calculation separates real businesses from expensive hobbies.
Every successful business passes this fundamental test.
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Are you ready to learn the most important formula in business?
Unit economics asks one critical question: Does the money you make from each customer exceed what it costs to get them?
If yes, you have a viable business. If no, you have a money-losing machine disguised as a business.
Give one reason this comparison matters for business success.
Customer Lifetime Value (LTV) is the total money one customer will pay you over their entire relationship with your business.
For a subscription box at $30/month where customers stay 3 months on average, LTV = $30 × 3 = $90.
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What's the LTV if customers pay $25/month and stay for 4 months?
Customer Acquisition Cost (CAC) is how much you spend on marketing and sales to get one new customer.
If you spend $100 on Facebook ads and get 10 new customers, your CAC = $100 ÷ 10 = $10 per customer.
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If you spend $200 on ads and get 20 customers, what's your CAC?
The magic formula is simple: LTV must be greater than CAC. If you make $90 per customer but spend $10 to get them, you profit $80 per customer.
This $80 covers your other costs and hopefully leaves profit for growth.
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What happens if your CAC exceeds your LTV?
Let's see healthy unit economics in action. A meal delivery service spends $15 on ads per new customer. Each customer orders $40/month for 6 months on average.
