Fast revenue growth can hide a business that loses money on every customer. Unit economics show whether each customer, or each order, earns or costs you money once you count what it takes to win and serve them. This guide explains four core metrics and works through a hypothetical example in PKR that you can rebuild in a spreadsheet in under an hour.
Pick your unit first
A unit is the thing you sell again and again:
- A subscriber, for a software or subscription business.
- An order, for e-commerce or food delivery.
- A client account, for a B2B service.
Use the same unit across all four metrics.
The four metrics
Contribution margin
Contribution is the revenue from one unit minus the variable costs of serving it. Variable costs rise with each extra unit: payment fees, delivery, packaging, cloud usage, SMS, direct support and the cost of goods. Leave out fixed costs such as office rent or the core team’s salaries.
Contribution margin = contribution ÷ revenue.
Count revenue net of sales tax. If you charge provincial sales tax on services, that money belongs to the tax authority, not to you.
Customer acquisition cost (CAC)
CAC is what it costs to win one new customer.
CAC = total sales and marketing spend in a period ÷ new customers won in that period.
Include ad spend, sales salaries and commissions, agency fees, launch discounts and the cost of free trials. A CAC that counts only ad spend flatters you without informing you.
Lifetime value (LTV)
LTV is the total contribution a customer generates before they leave. For a subscription with steady monthly churn, a simple version is:
LTV = monthly contribution per customer ÷ monthly churn rate.
Use contribution, not revenue. An LTV built on revenue overstates what a customer is worth.
Payback period
Payback is how many months of contribution it takes to earn back the CAC.
Payback (months) = CAC ÷ monthly contribution per customer.
Payback is about cash. Even with a healthy LTV, a long payback means you spend cash months before it comes back, and fast growth can drain your bank account.
A hypothetical worked example
The business and every number below are invented for illustration.
A Karachi startup sells inventory software to small shops for PKR 2,500 per month, excluding sales tax. Its variable costs per shop are:
| Cost item | PKR per shop per month |
|---|---|
| Cloud hosting and SMS | 300 |
| Payment collection fees | 100 |
| Customer support (share of support staff time) | 350 |
| Total variable cost | 750 |
- Contribution per shop: 2,500 − 750 = PKR 1,750 per month.
- Contribution margin: 1,750 ÷ 2,500 = 70%.
In one month, the startup spends:
- Social media ads: PKR 500,000.
- Two field sales staff, salaries and commission: PKR 400,000.
- Launch discounts for new shops: PKR 100,000.
That is PKR 1,000,000 in total, and it signs 100 new shops.
- CAC: 1,000,000 ÷ 100 = PKR 10,000.
- Monthly churn: 5% of shops cancel each month.
- LTV: 1,750 ÷ 0.05 = PKR 35,000.
- LTV to CAC: 35,000 ÷ 10,000 = 3.5.
- Payback: 10,000 ÷ 1,750 = about 5.7 months.
What the founders learn
- Each shop is worth about 3.5 times what it costs to win. A rule of thumb you will often hear is at least 3 to 1. Treat it as a starting point for discussion, not a law.
- Payback under six months means growth does not lock up cash for long.
- If churn rose to 10%, LTV would fall to PKR 17,500 and LTV to CAC to 1.75. In this example, retention is the biggest lever.
- If support costs rose by PKR 250 per shop, contribution would fall to PKR 1,500 and payback would stretch to about 6.7 months.
Orders instead of subscribers
For an e-commerce business, calculate contribution per order. Include product cost, packaging, courier charges, payment or cash collection fees, and an allowance for returns and failed deliveries. A cash-on-delivery parcel refused at the door still costs you delivery and handling, so build that into your average.
Then compare CAC with the contribution from a customer’s first order plus the repeat orders you can reasonably expect, based on your own data.
Turning the numbers into decisions
Unit economics are only useful if they change what you do. They help with three common decisions:
- Which channel to grow. Hypothetically, if field sales win shops at a CAC of PKR 8,000 and ads win them at PKR 14,000 with higher churn, shift budget towards field sales until its CAC starts to rise.
- Whether to change your price. A price rise that loses few customers can improve contribution, LTV and payback at once. Test it on a group of new customers before you change it for everyone.
- When to spend more on growth. If payback is short and churn is stable, extra acquisition spending is likely to pay back. If payback is long or churn is rising, fix retention before you scale.
Common mistakes
- Blended CAC only. Mixing free word-of-mouth customers with paid ones can hide an expensive channel. Calculate CAC for each channel as well.
- Ignoring discounts. A first-month discount is an acquisition cost.
- Treating early churn as permanent. Churn often changes as cohorts age. Recalculate it monthly by cohort.
- Forgetting cost inflation. If salaries, rent or courier rates rise, your contribution falls. Update the model every quarter, and use the State Bank of Pakistan’s Monetary Policy Statements, which set out its view on inflation, to sense-check your cost assumptions.
- Ignoring currency. If some costs are priced in dollars, such as cloud hosting or software tools, model the exchange rate explicitly and test a weaker rupee.
Checklist
- Define your unit.
- List every variable cost per unit and calculate contribution margin.
- Calculate CAC for each channel and blended, including salaries and discounts.
- Measure monthly churn by cohort.
- Calculate LTV, LTV to CAC and payback.
- Test what happens if churn, CAC or costs move by 20%.
- Review the numbers every month and share them with your team.
Sources and further reading
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