Unit economics in any business
Per order, per store, per flight, per seat and per room: contribution, breakeven, CAC, LTV and payback, worked in five industries.
Key takeaways
- Unit economics asks one question: does one unit (one order, one customer, one store, one seat, one flight) make money after its own costs, and how many units are needed to cover everything else?
- Common mistakes: Using revenue instead of contribution in LTV.
- Contribution per unit: the price of one unit minus the variable costs of that unit.
- Contribution margin: contribution divided by price.
- Breakeven volume: fixed costs divided by contribution per unit. Below this volume the business loses money.
Key idea
Unit economics asks one question: does one unit (one order, one customer, one store, one seat, one flight) make money after its own costs, and how many units are needed to cover everything else?
Every business sells something many times over. That repeated thing is its natural unit. Once you find it, the same few ideas work in every industry. Here they are, in plain words.
The ideas you need
- Contribution per unit: the price of one unit minus the variable costs of that unit. It "contributes" first to paying fixed costs, then to profit.
- Contribution margin: contribution divided by price.
- Breakeven volume: fixed costs divided by contribution per unit. Below this volume the business loses money.
- CAC (customer acquisition cost): total sales and marketing spend divided by the number of new customers won.
- LTV (customer lifetime value): contribution per period times the number of periods an average customer stays. If a steady share of customers leaves each month (monthly churn), the average lifetime in months is about 1 divided by monthly churn.
- Payback period: CAC divided by contribution per period. It tells you how long before the money spent to win a customer comes back.
| Industry | Natural unit | The core equation | Metrics people quote |
|---|---|---|---|
| Coffee shop or restaurant | One order; one store | Store profit = orders x contribution per order minus store fixed costs | Average order value, orders per day, sales per store |
| Airline | One flight; one seat | Flight profit = seats x load factor x revenue per passenger minus cost of the flight | Load factor, revenue and cost per available seat kilometre |
| Software sold by subscription (SaaS) | One seat (user licence) or one customer | LTV = monthly contribution x months retained | Recurring revenue, churn, CAC payback |
| Delivery app or online grocer | One order | Contribution per order = revenue per order minus picking, delivery and payment costs | Orders per day, contribution per order |
| Hotel | One room night | RevPAR = occupancy x average daily rate | Occupancy, average daily rate (ADR), RevPAR |
| Mobile operator | One subscriber | Revenue = subscribers x average revenue per user (ARPU) | ARPU, churn |
| Hospital | One bed day or one admission | Revenue = beds x occupancy x days x revenue per occupied bed day | Occupancy, average length of stay |
| Factory | One unit made | Profit = units x (price minus variable cost) minus fixed costs | Utilization, cost per unit |
So-what
Find the unit first. The rest of the case usually follows from its equation.
Worked case
1. Per store: a bubble tea shop in Singapore
The prompt
A fictional bubble tea shop in Singapore sells 9,000 cups a month at SGD 5.50 each. Ingredients, cup and packaging cost SGD 1.60 per cup. Monthly fixed costs are rent SGD 12,000, staff SGD 14,000 and other costs SGD 3,000. Opening the shop cost SGD 150,000. Does one store make money, and how long does it take to pay back the opening cost?
The structure
- Store profit = cups x contribution per cup minus fixed costs
- Contribution per cup
- Fixed costs per month
- Key: Breakeven cups and payback
Working it through
1. Contribution per cup
Price minus the variable cost of one cup.
Contribution per cup (SGD):5.5 - 1.6 = 3.92. Monthly contribution
9,000 cups at SGD 3.90.
Monthly contribution (SGD):9,000 × 3.9 = 35,1003. Fixed costs
Rent, staff and other costs.
Monthly fixed costs (SGD):12,000 + 14,000 + 3,000 = 29,0004. Store profit
Contribution minus fixed costs.
Monthly store profit (SGD):35,100 - 29,000 = 6,1005. Breakeven volume
Fixed costs divided by contribution per cup.
Breakeven cups per month:29,000 ÷ 3.9 = 7,4366. Payback
Opening cost divided by monthly profit.
Payback (months):150,000 ÷ 6,100 = 24.59
The recommendation
Yes, but only just. The store needs about 7,440 cups a month to break even and sells 9,000, a buffer of about 17 percent. Payback takes about 25 months. The biggest levers are cups per day (location) and rent. A 10 percent fall in volume would cut profit by more than half, because the fixed costs do not fall.
Worked case
2. Per flight: a short-haul flight in Europe
The prompt
A short-haul flight in Europe has 180 seats and flies 85 percent full. Each passenger pays an average fare of EUR 80 plus EUR 20 for extras such as bags and seat choice. One flight costs EUR 4,200 in fuel, EUR 3,000 in airport and navigation fees, EUR 1,800 for crew, EUR 1,200 for maintenance, EUR 2,500 for the aircraft (lease or ownership) and EUR 1,100 of overhead. Does the flight make money, and at what load factor does it break even?
The structure
- Flight profit = passengers x revenue per passenger minus cost per flight
- Passengers = seats x load factor
- Revenue per passenger = fare + extras
- Cost per flight
Working it through
1. Passengers
180 seats, 85 percent full.
Passengers per flight:180 × 0.85 = 1532. Revenue
153 passengers at EUR 100 each (fare plus extras).
Revenue per flight (EUR):153 × (80 + 20) = 15,3003. Cost
Add all the costs of the flight.
Cost per flight (EUR):4,200 + 3,000 + 1,800 + 1,200 + 2,500 + 1,100 = 13,8004. Profit
Revenue minus cost.
Profit per flight (EUR):15,300 - 13,800 = 1,5005. Breakeven load factor
Cost divided by the revenue of a completely full flight.
Breakeven load factor (percent):13,800 ÷ (180 × 100) × 100 = 76.67
The recommendation
The airline should keep flying this route, since each flight earns EUR 1,500, but it must manage fares closely, because the flight breaks even at about 77 percent full against 85 percent today. First, only 8 or 9 points of load factor separate profit from loss. Second, extras matter: with the fare alone, 153 passengers at EUR 80 bring EUR 12,240, below the EUR 13,800 cost. The risk is a fall in demand or a rise in fuel cost, which would wipe out the margin. As a next step, track bookings and adjust fares seat by seat to stay above 77 percent.
Worked case
3. Per seat and per customer: software sold by subscription
The prompt
A fictional software company in Bengaluru sells project tools to small firms in the US. It charges USD 30 per seat (one user) per month, with a gross margin of 80 percent. A typical customer buys 20 seats. Winning a customer costs USD 7,200 in sales and marketing. Each month, 2 percent of customers leave. Is a customer worth winning?
The structure
- Compare LTV with CAC, and check payback
- Contribution per customer per month
- Average lifetime = 1 / monthly churn
- Key: LTV, LTV to CAC, payback
Working it through
1. Contribution per seat
USD 30 at an 80 percent gross margin.
Contribution per seat per month (USD):30 × 0.8 = 242. Contribution per customer
20 seats.
Contribution per customer per month (USD):24 × 20 = 4803. Payback
CAC divided by monthly contribution.
CAC payback (months):7,200 ÷ 480 = 154. Average lifetime
1 divided by 2 percent monthly churn.
Average customer lifetime (months):1 ÷ 0.02 = 505. LTV
Monthly contribution times lifetime.
LTV (USD):480 × 50 = 24,0006. LTV to CAC
LTV divided by CAC.
LTV to CAC ratio:24,000 ÷ 7,200 = 3.33
The recommendation
Yes, the company should keep winning customers, because each one returns about 3.3 times its USD 7,200 cost to win, an LTV of USD 24,000. First, each customer contributes USD 480 a month (20 seats at USD 24), so the cost comes back in 15 months. Second, at 2 percent monthly churn a customer stays about 50 months, well beyond payback. The risk is churn: at 4 percent a month, lifetime halves to 25 months and LTV falls to USD 12,000. As a next step, track churn by customer cohort every month.
Worked case
4. Per order: an online grocer in Brazil
The prompt
A fictional online grocer in São Paulo has an average order of BRL 120, with a gross margin of 22 percent on the groceries. For each order it pays BRL 6 to pick and pack, BRL 9 for delivery, and payment fees of 2 percent of the order. Each small warehouse (a dark store) costs BRL 90,000 a month to run. How many orders a day does a dark store need to break even?
The structure
- Breakeven orders = dark store fixed costs / contribution per order
- Gross profit per order
- Minus picking, delivery and payment costs
- Orders per month and per day
Working it through
1. Gross profit per order
BRL 120 at a 22 percent margin.
Gross profit per order (BRL):120 × 0.22 = 26.42. Payment fee
2 percent of the order.
Payment fee per order (BRL):120 × 0.02 = 2.43. Contribution per order
Gross profit minus picking, delivery and payment.
Contribution per order (BRL):26.4 - 6 - 9 - 2.4 = 94. Breakeven orders per month
Fixed costs divided by contribution.
Breakeven orders per month:90,000 ÷ 9 = 10,0005. Per day
Over a 30-day month.
Breakeven orders per day:10,000 ÷ 30 = 333
The recommendation
The grocer should open more dark stores only where each can reach about 333 orders a day, because each order contributes just BRL 9 against BRL 90,000 of monthly fixed cost per store. This means a store needs 10,000 orders a month to break even; below that it loses money even though every order is profitable. The main levers are bigger baskets, which spread the BRL 9 delivery cost, and denser neighbourhoods. The risk is that discounts used to build volume cut the contribution further. As a next step, track daily orders per store against the 333 threshold.
Worked case
5. Per room night: a hotel in Dubai
The prompt
A fictional 200-room hotel in Dubai sells rooms at an average daily rate (ADR) of AED 600, and on average 75 percent of rooms are occupied. Cleaning, laundry, amenities and booking commission cost AED 120 per occupied room night. What are RevPAR (revenue per available room), room revenue in a 30-day month, and the monthly contribution from rooms?
The structure
- RevPAR = occupancy x ADR
- Room revenue = RevPAR x rooms x days
- Contribution = occupied room nights x (ADR minus variable cost)
Working it through
1. RevPAR
ADR times occupancy.
RevPAR (AED):600 × 0.75 = 4502. Monthly room revenue
RevPAR times 200 rooms times 30 days.
Monthly room revenue (AED):450 × 200 × 30 = 2,700,0003. Occupied room nights
200 rooms, 75 percent full, 30 days.
Occupied room nights per month:200 × 0.75 × 30 = 4,5004. Contribution
Each occupied night contributes AED 600 minus AED 120.
Monthly contribution from rooms (AED):(600 - 120) × 4,500 = 2,160,000
The recommendation
The hotel should manage its rooms business on RevPAR, now AED 450, because it combines the AED 600 rate and 75 percent occupancy in one number. First, rooms bring about AED 2.7 million of revenue and AED 2.16 million of contribution a month, since each of the 4,500 occupied nights costs only AED 120. Second, most other hotel costs are fixed, which means every extra occupied night adds about AED 480 to profit. The risk is chasing occupancy with discounts that cut the rate more than they add nights. As a next step, compare occupancy and rate with nearby competitors.
Four rules that work in every industry
- Find the natural unit first. Ask: what does this business sell, many times over?
- Separate variable costs (they move with each unit) from fixed costs (they do not, at least in the short term).
- Check the unit before the volume. If one unit loses money, more volume makes things worse.
- For businesses that pay to win customers, compare LTV with CAC and check the payback period, because the cash spent today comes back slowly.
Using revenue instead of contribution in LTV. Putting fixed costs inside the unit (a shop's rent is not a cost per cup). Forgetting discounts, refunds and payment fees. Using one average that hides very different customer groups, such as heavy and light users. Assuming churn stays the same as the company grows: newer customers often leave faster than early ones.
A gym in Nairobi charges members KES 4,000 a month. The variable cost per member is KES 800 a month. Fixed costs are KES 1,600,000 a month. How many members does it need to break even?
A software customer brings USD 200 of contribution a month and cost USD 3,000 to win. What is the CAC payback period, in months?
Monthly churn is 5 percent and monthly contribution per customer is EUR 40. Using average lifetime = 1 divided by monthly churn, what is the LTV in EUR?
Which is a variable cost for a coffee shop?
Each order loses money after delivery costs. The founder wants to double the number of orders. What happens?
What does RevPAR combine?
Sources for this lesson (1)
- Recognized public explanations of case-interview concepts and frameworks
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