Unit Economics Formulas: Revenue, Cost, and Contribution Per Unit

The core unit economics formula is contribution per unit = revenue per unit minus variable cost per unit, and nearly every other measure in this field, from break-even to lifetime value, builds on it. This reference collects the formulas you need, defines each term, and works every one of them through a single hypothetical example so you can see how they connect. Use it as a checklist when you build a model, and as a set of definitions to keep your team consistent. It supports unit economics and budgeting and forecasting, follows the introduction in what is unit economics, and is followed by contribution margin and the contribution margin formula.

The worked example used throughout

A hypothetical subscription box business (illustrative figures):

1. Revenue per unit

Revenue per unit = Net revenue / Number of units

Use net revenue after discounts, refunds and taxes you do not keep. Here: $50 per box (assuming no discounts).

2. Variable cost per unit

Variable cost per unit = Sum of costs that rise with each unit

Product $18 + packaging and fulfillment $5 + shipping $6 + payment fees $1.50 = $30.50.

3. Contribution per unit

Contribution per unit = Revenue per unit - Variable cost per unit

$50 - $30.50 = $19.50 per box per month.

4. Contribution margin ratio

Contribution margin % = Contribution per unit / Revenue per unit

$19.50 / $50 = 39%. This is the share of each sales dollar available to cover fixed costs and profit.

5. Total contribution and profit

Total contribution = Contribution per unit × Units sold
Operating profit = Total contribution - Fixed costs

At 2,500 boxes a month: 2,500 × $19.50 = $48,750. Profit = $48,750 - $42,000 = $6,750.

6. Break-even units and revenue

Break-even units = Fixed costs / Contribution per unit
Break-even revenue = Fixed costs / Contribution margin %

$42,000 / $19.50 = 2,153.8, so 2,154 boxes a month. In revenue: $42,000 / 0.39 = $107,692 (2,154 × $50 = $107,700, the small difference is rounding). The margin of safety at 2,500 boxes is (2,500 - 2,154) / 2,500 = 13.8%. See break-even point formula.

7. Customer acquisition cost (CAC)

CAC = Total acquisition spend / New customers acquired

Given in the example: $90 per subscriber. If the business spent $18,000 on marketing and sales in a month and gained 200 subscribers, CAC = $18,000 / 200 = $90. See how to calculate CAC.

8. Customer lifetime and lifetime value (LTV)

Expected lifetime (months) = 1 / Monthly churn rate
LTV (contribution basis) = Contribution per month × Expected lifetime

Lifetime = 1 / 0.05 = 20 months. LTV = $19.50 × 20 = $390. This is a simplification that assumes constant churn and constant margin. See how to calculate customer lifetime value.

9. LTV to CAC ratio

LTV : CAC = LTV / CAC

$390 / $90 = 4.3. Interpreting the ratio requires care about how LTV was computed. See LTV to CAC ratio.

10. CAC payback period

CAC payback (months) = CAC / Monthly contribution per customer

$90 / $19.50 = 4.6, so about 4.6 months. Cash invested to acquire the subscriber returns in under five months, on average. See CAC payback period.

11. Retention and churn

Churn rate = Customers lost in period / Customers at start of period
Retention rate = 1 - Churn rate

If 5 percent churn per month, annual retention of a cohort = 0.95^12 = 54.0%, so 46 percent of a cohort is gone in a year. See churn rate and customer retention rate.

12. Gross margin versus contribution margin

Gross margin % = (Revenue - Cost of goods sold) / Revenue

If cost of goods sold includes product, packaging and fulfillment ($23) but shipping and payment fees sit in operating expenses, gross margin = ($50 - $23) / $50 = 54%, while contribution margin is 39%. The gap is the reason to manage to contribution. See gross margin vs. contribution margin.

Summary table

Excel versions

Contribution per unit:     =Price-VariableCost
Contribution margin:       =(Price-VariableCost)/Price
Break-even units:          =ROUNDUP(FixedCosts/(Price-VariableCost),0)
LTV:                       =(Price-VariableCost)/Churn
LTV:CAC:                   =LTV/CAC
CAC payback (months):      =CAC/(Price-VariableCost)

Keep each input in its own cell and reference it by name or address, never typed inside the formula.

A quick sensitivity check

What if churn is 7 percent instead of 5? Lifetime = 1 / 0.07 = 14.3 months; LTV = $19.50 × 14.3 = $278.6; LTV : CAC = 3.1; CAC payback is unchanged at 4.6 months. A 2-point increase in churn removes 29 percent of lifetime value ($390 to $279). The formulas are simple, but the inputs, particularly churn, decide the answer. See sensitivity analysis on unit economics.

Pitfalls to avoid

• Using revenue before discounts or refunds.
• Leaving shipping, returns or payment fees out of variable costs.
• Using blended CAC when paid channels are the real driver.
• Computing LTV from revenue instead of contribution.
• Assuming constant churn when early-life churn is higher. See cohort analysis.
• Mixing monthly and annual rates.

How the formulas connect

The formulas form a chain, and it helps to see the direction of the links. Price and variable cost determine contribution per unit. Contribution per unit, together with fixed costs, determines break-even volume and profit at any sales level. Contribution per unit, together with churn, determines customer lifetime value. Lifetime value, compared with acquisition cost, gives the LTV to CAC ratio, and contribution per unit compared with acquisition cost gives payback. Because everything flows from the same few inputs, an error in variable cost spreads through every other result. That is the reason to check the variable cost list first.

A price what-if on the same example

Suppose the subscription box business raises its price from $50 to $54 and assumes no change in volume or churn. Payment fees are 3 percent of price, so they rise to $1.62.

• Variable cost per box = $18 + $5 + $6 + $1.62 = $30.62
• Contribution per box = $54 - $30.62 = $23.38
• Contribution margin = 23.38 / 54 = 43.3%
• Break-even boxes = 42,000 / 23.38 = 1,796.4, so 1,797 boxes
• LTV = $23.38 × 20 = $467.60
• LTV : CAC = 467.60 / 90 = 5.2
• CAC payback = 90 / 23.38 = 3.8 months

An $4 price rise, 8 percent, lifted contribution per box by 20 percent, from $19.50 to $23.38. That is the leverage in the formulas. The assumption of unchanged volume and churn is the weak point. Test what happens if the higher price loses subscribers, using the sensitivity method in the section above, before acting on the result.

Choosing inputs and timing

The formulas are only as good as the inputs, and three choices matter more than any others.

Period. Use the same period for all inputs. If acquisition spend is monthly, new customers must be monthly too. Marketing spend in one month often produces customers in the next, so a lag of a few weeks may be needed for an accurate CAC.

Revenue basis. Use net revenue after discounts, refunds and credits. For subscriptions, use the amount actually collected per month, not the list price.

Cost basis. Use cost per unit at current prices, not historical averages, when making forward-looking decisions. If supplier prices have just risen, the old average understates today's cost.

Building the model in a spreadsheet

Set the model up on one sheet with three blocks: inputs, calculations and outputs. Put each input in a labeled cell, color the inputs differently from the formulas, and never type a number inside a formula. Add a small table that varies one input at a time, such as churn from 3 to 8 percent, and shows the effect on LTV and payback. A model laid out this way can be audited by someone else in minutes and updated when a cost changes. For a fuller treatment of sensitivity tables, see the article on sensitivity analysis on unit economics.

FAQs

What is the formula for unit economics?

Contribution per unit equals revenue per unit minus variable cost per unit. Related measures include contribution margin, break-even units, CAC, LTV and CAC payback.

How do you calculate contribution per unit?

Subtract all variable costs per unit from the net price per unit.

How do you calculate LTV from unit economics?

Multiply monthly contribution per customer by expected lifetime in months, where lifetime is one divided by monthly churn, or use a cohort-based measure.

What is a good LTV to CAC ratio?

It depends on the business and how LTV is calculated. Look at the ratio together with payback and cash needs.