Your Guide to Unit Economics | Tory Burch Foundation

Unit economics are your business’s vital signs. And knowing how to use unit economics is crucial to your company’s health. Ignore it, and you risk everything you’ve built. 

“We can’t control the macroeconomics,” said Carrie Kerpen, founder and CEO of The Whisper Group, an exit-readiness firm. “But we can control our own actions and the economics of our businesses to turn them into life-changing assets.” 

In our latest webinar series, Kerpen walked us through the nuts and bolts of unit economics: what it is, how to use it, and, most importantly, how to master it to drive real, sustainable growth.

WHAT IS UNIT ECONOMICS?

In plain terms, unit economics refers to the direct revenue and costs associated with a single unit of your business, whether that’s one product, one order, one subscription, one contract, or one customer. It’s applicable to any type of work or industry. 

Here’s the tricky part: there are endless potential units within a company. The key is knowing what to measure and why. 

THE FIVE ESSENTIAL MEASUREMENTS. 

Once you’ve defined your unit, the next step is determining the metrics behind it. 

Customer Acquisition Cost (CAC) 

The cost to acquire a customer (or your chosen unit). Calculate the full picture, e.g., from social media to sales staff to site build, not just advertising costs. 

Formula: CAC=Total Marketing and Sales Cost / New Customers Acquired

Lifetime Value (LTV) 

The long-term financial worth of a customer. 

Formula: LTV=Average Purchase Value x Annual Average Purchase Frequency x Average Customer Lifetime 

Gross Margin

The percentage of revenue left after subtracting the direct cost of goods sold (COGS), which can range from production and shipping (for products) to employee salaries and tools (for services). Indirect costs, like overhead, are not included. 

Formula: (Revenue – Cost of Goods) / Revenue x 100%

Payback Period 

How long it takes to earn back your CAC. If you get it back in under six months, that’s a robust business; over 12 months, time to rethink your CAC or your margins. 

This is particularly critical for bootstrapped companies. If you’re going to spend, say, $20,000 of your own money sponsoring a conference, make sure it’s a smart bet. You can do that by having a good payback period. 

Formula: CAC / Monthly Profit Per Customer

Retention or Churn

The loyalty metric—do your customers keep coming back? Alternatively, you can measure the percentage of customers lost, a.k.a. the churn rate. Think of these as two sides of the same coin. 

Retention Formula: ((End Customers – New Customers) / Start Customers) x 100%

Churn Formula: (Lost Customers / Start Customers) x 100%

Your point of sale system or customer relationship management (CRM) system should have some of these values, like number of customers, average order value and revenue.

If your gut is telling you something is off, but you can’t identify why, unit economics helps.

SHIFT YOUR UNIT, SHIFT YOUR PERSPECTIVE. 

By now, you’ve seen how your unit can reveal incredible insights about your business. But did you know changing it can completely reframe what you learn? 

Kerpen shared the example of a pickleball club owner. If the unit is the court, the learnings are operational; CAC and LTV don’t apply here because the emphasis is on capacity. “If it costs $25,000 to build and you’re netting $6,500 a month, you’ve paid for your court in four months. You’ll be profitable if you’re fully booked,” she said. “But what do you need to measure to make sure you are fully booked?” 

When you pivot to a customer unit, you’re measuring the cost to acquire each player, how often they come back, and how much they spend. The COGS are different, and relationships and retention are your biggest profit drivers. More than simply changing what you measure, you’re changing how you understand your business’ success—instead of whether it’s efficient, you’re asking if it’s sustainable. 

“As the owner, you instinctively know you need more customers,” she continued, “but you need to make sure you’re filling the courts all the time. Once you sit with the numbers, you’ll know what to do.”

THE BENCHMARKS, BY INDUSTRY.

Good unit economics are going to change depending on industry and business models, but these are good guideposts as you try to see the story your numbers tell you. 

Product Businesses (E-Commerce, Consumer Packaged Goods, and Direct-to-Consumer)

• CAC: Depends on average order value (AOV), but should be recouped in one to two purchases
• LTV: Three to five times CAC
• Gross Margin: 60-80%
• Payback Period: Less than three months 
• Return Rate (for physical goods): Less than 10%; anything greater than 15% can destroy margins
• Churn Rate (for subscriptions): Less than 5% monthly

Service Businesses (Agencies, Coaching, and SaaS-Light)

• CAC: $500-$2,000, depending on client size (high-ticket services can be higher as long as payback is fast)
• LTV: Five to ten times CAC
• Gross Margin: 40-60%
• Payback Period: Less than three months for small services, less than six for larger ones
• Churn Rate: Less than 10% annually

SaaS Businesses

• CAC: Often higher, but acceptable if LTV is also high
• LTV: Three to seven times CAC—or greater
• Gross Margin: 75-90%
• Payback Period: Less than 12 months is standard; less than six is ideal
• Churn Rate: Less than 2% monthly

Retail Businesses (Physical Stores and Direct-to-Consumer)

• CAC: Depends on AOV, but should be recouped in one to two purchases 
• LTV: Two to four times CAC
• Gross Margin: 50-65%
• Payback Period: Less than two months or in one to two orders
• Return Rate (for physical goods): Less than 10%
• Churn Rate (for subscriptions): Less than 5% monthly

ng that the culprit will likely be tied to your gross margins, LTV, or CAC. “Use them as a guide or guardrail, not a mandate.”

For Seasonal Businesses

Seasonal businesses may find that the ebb and flow of their industries mean their unit economics don’t look great. If your company relies on certain times of the year, like the holidays, Kerpen emphasized focusing on cash flow management. “How do you build to make sure you can sustain the off-season?” she asked. “And what can you do during that time that could be interesting?” 

Low Gross Margins

Faced with low gross margins? You may need to simply increase your prices. Or you could be overdelivering, i.e. investing more time or resources than the price covers. By improving onboarding and systems to be faster and more efficient, you can increase profitability. 

Poor LTV

Whether due to high returns or non-renewals, a weak LTV means customers don’t stay long. Build stronger retention and loyalty programs to keep them engaged.  

High CAC

CAC suffers when your sales or marketing efforts are inconsistent or hard to track. “We’ve gotten so heavy into measuring every last detail,” Kerpen noted. “Take a macro look—what are you doing, what does it cost, and is it effective? If not, could those dollars be spent elsewhere?” 

With the fundamentals in place, layer in quick fixes to strengthen your business even more. 

Upsell and Cross-Sell

“Your current customers are the best source of revenue growth,” Kerpen pointed out. “They already love you.” 

Prepaid Packages

This is especially relevant toward the end of the year, when clients may have leftover budget. Letting them pay upfront for future goods and services boosts cash flow immediately. 

Referral Program

“This is a great way to get good returns with low capital,” she explained. 

Reduce Scope Creep

Watch what you’ve promised versus what you’ve delivered. Incorporate the extra work into the scope and raise your price accordingly. 

WHY UNIT ECONOMICS MATTERS TO INVESTORS.

Getting ready to sell? Buyers and investors prize predictability, profitability, and repeatability—they want proof your business works and will continue to do so. Aim for a high LTV and low CAC: the better your figures, the higher your exit multiple.

In an uncertain macro-environment, Kerpen added, profits take center stage. But don’t forget what makes your business unique. “You can have two companies with the identical numbers,” said Kerpen, “but different exit valuations.”