Unit Economics Calculator

How to use the unit economics calculator

1. How customers pay you: choose subscription if people pay a monthly fee, or per order if they buy when they need to (a shop, a service, a marketplace).
2. Revenue: enter what an average customer pays you each month, or the average value of one order.
3. Direct cost: enter only costs that rise with each customer or order, such as materials, shipping, payment fees, hosting and paid support time. Leave out rent, salaries and software you would pay for anyway.
4. Churn or orders per customer: for a subscription, enter the share of customers who cancel each month, which is your churn rate. For orders, enter how many times an average customer buys before they stop.
5. Cost to win a customer: enter your customer acquisition cost. If you do not know it yet, the CAC calculator works it out from your marketing spend.

The result updates as you type. You get contribution per customer, contribution margin, lifetime value, the LTV to CAC ratio, the payback time and the profit left per customer after you have paid to win them.

The unit economics formulas

Dividing by churn works because 1 divided by the monthly churn rate is the average number of months a customer stays. At 4% monthly churn, that is 25 months. This is the most common simple convention for customer lifetime value. It counts contribution, not revenue, so the ratio is not flattered by money that goes straight out again to suppliers.

Payback is measured in months for a subscription and in orders for a per order business.

A worked example for a subscription

Say you run a small software product. An average customer pays $60 a month. Hosting, payment fees and support cost you $15 a month for each customer. 4% of customers cancel each month, and you spend $250 on ads and sales time to win one customer. These are the values the calculator starts with.

Each customer returns four and a half times what it cost to win them, and the $250 comes back in under six months. Now change churn to 10%. Lifetime drops to 10 months, LTV falls to $450 and the ratio falls to 1.8:1, with the same price and the same ads. That is why churn is usually the first number to fix.

A worked example for a per order business

Say you sell candles online. An average order is $40. The candles, packaging, shipping and card fees for that order cost $22. An average customer orders 5 times before they stop, and you pay $30 in ads to win each new customer. Switch the calculator to per order and these are the values it shows.

You lose money on the first order, because $18 of contribution does not cover $30 of ads. You are back in profit during the second order. If most customers only ever bought once, this business would lose $12 on each of them.

How to read your result

Start with contribution. If it is zero or negative, you lose money each time you serve a customer, and no amount of marketing can fix that. Raise the price or lower the direct cost first. The profit margin calculator helps you test prices.

Then look at the ratio. In his SaaS Metrics 2.0 guide, investor David Skok writes that the strongest software subscription businesses have an LTV to CAC ratio higher than 3, and that many of them recover their CAC in 5 to 7 months. He also stresses that these are guidelines. They come from software, so treat them as a reference point if you sell something else. The calculator shows green at 3:1 or above, amber between 1:1 and 3:1, and red below 1:1.

Last, check payback against your cash. A good ratio with a slow payback can still run you out of money, because you pay for the customer today and earn it back over many months. Compare the payback time with your runway.

• To raise contribution: raise prices, bundle products, or cut the direct cost per order.
• To raise lifetime: find out why people leave. Five short calls with customers who cancelled will tell you more than a dashboard.
• To lower CAC: double down on the one channel that already brings customers cheaply. This guide to finding your first 10 customers covers channels that cost time instead of money.

What the calculator leaves out

• Fixed costs. Rent, salaries and tools are not in here. Good unit economics means each customer adds profit, not that the whole business is profitable. Use the break-even calculator to see how many customers cover your fixed costs.
• The time value of money. A dollar earned in month 20 is counted the same as a dollar earned today. There is no discount rate.
• Changing behavior. It assumes churn, price and cost stay the same for the whole life of a customer. In practice, new customers often leave faster than old ones, and some customers upgrade.
• Mixed customer types. It uses one average customer. If you have two very different groups, run the numbers once for each.

If you have not launched yet, every input is a guess. That is fine for a first pass, but label it as a guess and replace each number with a real one as soon as you can: a price people have agreed to pay, a supplier quote, the cost of a small ad test. Fonda's Validate phase has you talk to real customers before you get a Verdict of go, refine or pivot, and those conversations are a good place to test the price you entered here.