/financial-unit-economics

name: financial-unit-economics
description: Use when evaluating business model viability, analyzing profitability per customer/product/transaction, validating startup metrics (CAC, LTV, payback period), making pricing decisions, assessing scalability, comparing business models, or when user mentions unit economics, CAC/LTV ratio, contribution margin, customer profitability, break-even analysis, or needs to determine if a business can be profitable at scale.

Financial Unit Economics

Table of Contents

• [Purpose](#purpose)
• [When to Use](#when-to-use)
• [What Is It?](#what-is-it)
• [Workflow](#workflow)
• [Common Patterns](#common-patterns)
• [Guardrails](#guardrails)
• [Quick Reference](#quick-reference)

Purpose

Financial Unit Economics analyzes the profitability of individual units (customers, products, transactions) to determine if a business model is viable and scalable. This skill guides you through calculating key metrics (CAC, LTV, contribution margin), interpreting ratios, conducting cohort analysis, and making data-driven decisions about pricing, marketing spend, and growth strategy.

When to Use

Use this skill when:

• **Business model validation**: Determine if startup/new product can be profitable at scale
• **Pricing decisions**: Set prices based on target margins and customer economics
• **Marketing spend**: Assess ROI of acquisition channels, optimize CAC
• **Growth strategy**: Decide when to scale (raise funding, increase spend) based on unit economics
• **Product roadmap**: Prioritize features that improve retention or reduce churn (increase LTV)
• **Investor pitch**: Demonstrate business model viability with CAC, LTV, payback metrics
• **Channel optimization**: Compare profitability across customer segments or acquisition channels
• **Subscription models**: Analyze recurring revenue, churn, cohort retention curves
• **Marketplace economics**: Model take rate, supply/demand side economics, liquidity
• **Financial planning**: Forecast cash flow, runway, burn rate based on unit economics

Trigger phrases: "unit economics", "CAC/LTV", "customer acquisition cost", "lifetime value", "contribution margin", "payback period", "customer profitability", "break-even", "cohort analysis", "is this business viable?"

What Is It?

**Financial Unit Economics** is the practice of measuring profitability at the most granular level (per customer, product, or transaction) to understand if revenue from a single unit exceeds the cost to acquire and serve it.

**Core components**:

• **CAC (Customer Acquisition Cost)**: Total sales/marketing spend ÷ new customers acquired
• **LTV (Lifetime Value)**: Revenue from customer over their lifetime minus variable costs
• **Contribution Margin**: (Revenue - Variable Costs) ÷ Revenue (as %)
• **LTV/CAC Ratio**: Measures return on acquisition investment (target: 3:1 or higher)
• **Payback Period**: Months to recover CAC from customer revenue
• **Cohort Analysis**: Track metrics over time for customer groups (by acquisition month/channel)

**Quick example:**

**Scenario**: SaaS startup, subscription model ($100/month), analyzing unit economics.

**Metrics**:

• **CAC**: $20k marketing spend, 100 new customers → CAC = $200
• **Monthly revenue per customer**: $100
• **Variable costs**: $20/customer/month (hosting, support)
• **Gross margin**: ($100 - $20) / $100 = 80%
• **Monthly churn**: 5% → Average lifetime = 1 / 0.05 = 20 months
• **LTV**: $100 revenue × 20 months × 80% margin = $1,600
• **LTV/CAC**: $1,600 / $200 = 8:1 ✓ (healthy, >3:1)
• **Payback period**: $200 CAC ÷ ($100 × 80% margin) = 2.5 months ✓ (good, <12 months)

**Interpretation**: Strong unit economics. Each customer generates 8× their acquisition cost. Can profitably scale marketing spend. Payback in 2.5 months means fast capital recovery.

**Core benefits**:

• **Early warning system**: Detect unsustainable business models before scaling losses
• **Data-driven growth**: Know when unit economics justify increasing spend
• **Channel optimization**: Identify which acquisition channels are profitable
• **Pricing power**: Quantify impact of price changes on profitability
• **Investor confidence**: Demonstrate path to profitability with clear metrics

Workflow

Copy this checklist and track your progress:

Unit Economics Analysis Progress:
- [ ] Step 1: Define the unit
- [ ] Step 2: Calculate CAC
- [ ] Step 3: Calculate LTV
- [ ] Step 4: Assess contribution margin
- [ ] Step 5: Analyze cohorts
- [ ] Step 6: Interpret and recommend

**Step 1: Define the unit**

What is your unit of analysis? (Customer, product SKU, transaction, subscription). See [resources/template.md](resources/template.md#unit-definition-template).

**Step 2: Calculate CAC**

Total acquisition costs (sales + marketing) ÷ new units acquired. Break down by channel if applicable. See [resources/template.md](resources/template.md#cac-calculation-template) and [resources/methodology.md](resources/methodology.md#1-customer-acquisition-cost-cac).

**Step 3: Calculate LTV**

Revenue over unit lifetime minus variable costs. Use cohort data for retention/churn. See [resources/template.md](resources/template.md#ltv-calculation-template) and [resources/methodology.md](resources/methodology.md#2-lifetime-value-ltv).

**Step 4: Assess contribution margin**

(Revenue - Variable Costs) ÷ Revenue. Identify levers to improve margin. See [resources/template.md](resources/template.md#contribution-margin-template) and [resources/methodology.md](resources/methodology.md#3-contribution-margin-analysis).

**Step 5: Analyze cohorts**

Track retention, LTV, payback by customer cohort (acquisition month/channel/segment). See [resources/template.md](resources/template.md#cohort-analysis-template) and [resources/methodology.md](resources/methodology.md#4-cohort-analysis).

**Step 6: Interpret and recommend**

Assess LTV/CAC ratio, payback period, cash efficiency. Make recommendations (pricing, channels, growth). See [reso