Unit Economics

Unit economics refers to the fundamental financial metrics that determine whether each customer or transaction is profitable for an e-commerce business. Unlike aggregate metrics (total revenue, total profit), unit economics zooms in on per-customer or per-order profitability to reveal whether the business model is sustainable at scale.

The core unit economics metrics for e-commerce are: Customer Acquisition Cost (CAC)-the total cost to acquire a customer including ad spend, creative production, and tools; Customer Lifetime Value (LTV)-total expected revenue from a customer; LTV:CAC Ratio-the return on acquisition investment; Contribution Margin-revenue minus all variable costs (COGS, shipping, payment processing, returns); and Payback Period-the time required to recoup the acquisition cost from a customer's purchases.

Understanding unit economics is essential for growth decisions. A brand with a 6-month payback period needs enough cash to fund 6 months of customer acquisition before seeing returns. Channel-specific unit economics reveal which acquisition sources bring the most profitable customers. And tracking unit economics over time shows whether efficiency is improving or degrading as the brand scales.