Unit economics

What is unit economics?

Unit economics is the revenue and cost tied to one unit of business, such as one customer, one contract or one job, used to judge whether growth is profitable. A software company usually studies one customer and compares lifetime value with acquisition cost. A services company might study one service agreement, one technician route or one job type.

Why it matters to a revenue leader

Unit economics show whether selling more makes the company better off. If each new agreement costs more to win and serve than it earns over its life, growth deepens the hole. For a revenue leader, unit economics are the bridge between sales effort and the P&L. A Harvard Business School note questions the 3:1 lifetime value to acquisition cost rule of thumb often cited by investors, and argues the best ratio is often lower.

A fire protection company studies its inspection agreements. The average agreement brings $6,000 a year at 40 percent gross margin, or $2,400 of gross profit, and lasts six years. Winning one costs about $4,000 in sales effort, so each new agreement returns about $14,400 of gross profit for $4,000 of cost.