Chapter 25: Unit Economics Mastery¶

Chapter Overview¶

Key Questions This Chapter Answers¶

1. What exactly are unit economics, and why do sophisticated investors obsess over them? Understanding the fundamental building blocks of business profitability at the most granular level.

2. How do you calculate and interpret CAC, LTV, contribution margin, and payback period? Moving beyond formulas to strategic interpretation of these critical metrics.

3. How do unit economics differ across industries? Understanding why SaaS, marketplaces, D2C, and fintech each require tailored approaches.

4. What levers actually improve unit economics? Practical strategies for reducing CAC, increasing LTV, and optimizing contribution margin.

5. When do unit economics not apply, and what do you focus on instead? Understanding when traditional metrics mislead in network effects, infrastructure, and land-grab phases.

Connection to Previous Chapters¶

Chapter 24 explored financial acumen at the company level, examining P&L statements, balance sheets, and cash flows. This chapter zooms in to the most granular level of analysis: the individual customer, transaction, or order.

Chapter 8's revenue model analysis and Chapter 11's zero-margin model examination both depend on unit economics for validation. A subscription model is only sustainable if LTV exceeds CAC; a zero-margin core is only viable if adjacent revenue exceeds variable costs per user.

What Readers Will Be Able to Do After This Chapter¶

• Calculate complete unit economics for any business model (SaaS, marketplace, D2C, fintech)
• Interpret unit economics in strategic context, not just computational accuracy
• Identify specific levers to improve CAC, LTV, contribution margin, and payback
• Evaluate when unit economics should drive decisions versus when they mislead
• Apply cohort analysis to understand unit economics evolution over time

Core Narrative¶

25.1 What Are Unit Economics and Why They Matter¶

Unit economics is the study of the direct revenues and costs associated with a particular unit of a business. That unit might be a customer (SaaS), an order (e-commerce), a transaction (payments), or a trip (ride-hailing).

The fundamental question unit economics answers: Does this business make money on a per-unit basis, and can that profitability scale?

Consider two companies with identical ₹1,000 Cr revenue. Company A loses ₹100 on every customer but has 1 crore customers. Company B makes ₹500 on every customer but has only 2 lakh customers. Which is more valuable?

Standard financial analysis cannot answer this. Both show revenue, both may show losses at the company level (due to fixed costs). But unit economics reveals that Company A has a structural problem that scaling worsens, while Company B has a scalable model where fixed costs will eventually be absorbed.

The Startup Imperative

Unit economics became a critical discipline during the 2021-2022 correction in startup valuations. Companies that burned cash assuming future improvement were punished; companies with demonstrated unit economics were rewarded.

Meesho achieved positive free cash flow (₹232 Cr) in FY24 with revenue of ₹7,615 Cr, though still reporting a net loss of ₹305 Cr—representing 82% loss reduction YoY [Source: The Economic Times, "Meesho FY24 revenue jumps 33% to Rs 7615 crore", Jul 2024]. Its zero-commission model achieved positive unit economics through logistics and advertising revenue, demonstrating a clear path to profitability.

Dunzo, by contrast, raised a total of $485.06 million [Source: Inc42, "Dunzo Funding Rounds", accessed Nov 2025] but eventually was admitted into the Corporate Insolvency Resolution Process (CIRP) [Source: Inc42, "After Vendors, Lenders Also Move NCLT Against Dunzo; All You Need To Know About The Troubled Startup", Dec 2024] because unit economics never worked: hyperlocal delivery costs exceeded revenue per order regardless of scale.

The Profitability Path

Unit economics provides a path to profitability that aggregate financials cannot:

Positive Unit Economics + Scale = Profitability

Negative Unit Economics + Scale = Faster Cash Burn

Zomato's journey illustrates this. In FY22, food delivery contribution was negative. By FY24, food delivery turned contribution positive, enabling ₹351 Cr net profit [Source: Zomato Annual Report FY24, https://www.zomato.com/investor-relations/annual-reports]. The unit economics improvement came from:

• Reduced delivery cost per order through route optimization.
• Higher average order value.
• Improved take rates as restaurant supply exceeded demand.

25.2 Key Metrics: CAC, LTV, Contribution Margin, Payback¶

Customer Acquisition Cost (CAC)¶

Definition:

CAC = Total Sales & Marketing Expense / Number of New Customers Acquired

But this simple formula hides complexity:

Blended vs. Channel CAC:

Blended CAC = Total S&M / Total New Customers
Channel CAC = Channel-Specific Spend / Customers from That Channel

Google Ads CAC might be ₹800 while organic social is ₹150. Blended CAC of ₹500 masks this variance.

Fully Loaded CAC:

Fully Loaded CAC = (S&M Expense + Sales Salaries + Marketing Tech + Onboarding) / New Customers

Enterprise SaaS companies often understate CAC by excluding sales salaries and implementation costs.

Worked Example: D2C Fashion Brand

Monthly data [Source: Hypothetical example for illustrative purposes]:

Performance Marketing Spend: ₹15,00,000
Influencer Marketing: ₹5,00,000
Creative Production: ₹2,00,000
Marketing Team Salaries: ₹3,00,000
Total Marketing Spend: ₹25,00,000

New Customers Acquired: 5,000

Blended CAC = ₹25,00,000 / 5,000 = ₹500 per customer

Channel breakdown [Source: Hypothetical example for illustrative purposes]:

Strategy implication: Scale Meta Ads (lowest paid CAC), reduce influencer spend, invest in organic growth.

Lifetime Value (LTV)¶

Definition:

LTV = Average Revenue per Customer × Gross Margin × Average Customer Lifetime

Or equivalently:
LTV = (Average Revenue per Period × Gross Margin) / Churn Rate

Components breakdown:

LTV = ARPU × Gross Margin × (1 / Churn Rate)

Where:
ARPU = Average Revenue Per User (per period)
Gross Margin = (Revenue - COGS) / Revenue
Churn Rate = Customers Lost / Total Customers (per period)

Worked Example: SaaS Company

Monthly ARPU: ₹2,000
Gross Margin: 80%
Monthly Churn: 3%

LTV = ₹2,000 × 0.80 × (1 / 0.03)
LTV = ₹1,600 × 33.3 months
LTV = ₹53,280

Alternative Calculation (Cohort-Based):

For more accurate LTV, track actual cohort revenue [Source: Hypothetical example for illustrative purposes]:

Cohort LTV at 36 months = ₹4,70,00,000 / 1,000 = ₹47,000 per customer

This is more conservative than the formula-based calculation because it captures actual behavior rather than assumed steady-state.

LTV:CAC Ratio¶

Definition:

LTV:CAC = Customer Lifetime Value / Customer Acquisition Cost

Benchmarks:

Worked Example:

LTV: ₹53,280
CAC: ₹15,000

LTV:CAC = ₹53,280 / ₹15,000 = 3.55:1

Interpretation: Healthy ratio, continue scaling acquisition

Contribution Margin¶

Definition:

Contribution Margin = Revenue - Variable Costs

Contribution Margin % = (Revenue - Variable Costs) / Revenue × 100%

Variable costs include everything that scales with each unit: COGS, fulfillment, payment processing, variable marketing, etc.

D2C Contribution Margin Waterfall:

MRP                          ₹1,500    100%
Less: Discounts               (₹300)   -20%
= Net Revenue               ₹1,200    80%
Less: COGS                   (₹400)   -27%
= Gross Profit               ₹800    53%
Less: Packaging               (₹50)    -3%
Less: Forward Shipping        (₹80)    -5%
Less: Payment Gateway         (₹24)    -2%
Less: RTO Allocation          (₹40)    -3%
Less: Returns Processing      (₹30)    -2%
= Contribution Margin (CM1)   ₹576    38%
Less: CAC Allocation         (₹450)   -30%
= Contribution Margin (CM2)   ₹126     8%

Payback Period¶

Definition:

CAC Payback = CAC / (ARPU × Gross Margin)

Or for subscription:
CAC Payback = CAC / Monthly Contribution Margin

Worked Example:

CAC: ₹15,000
Monthly ARPU: ₹2,000
Gross Margin: 80%
Monthly Contribution: ₹2,000 × 0.80 = ₹1,600

CAC Payback = ₹15,000 / ₹1,600 = 9.4 months

Benchmarks by Business Type:

[Source: SaaS Capital, "SaaS Benchmarks & Metrics Report", 2023, https://www.saas-capital.com/saas-benchmarks/]

25.3 Industry-Specific Unit Economics¶

SaaS Unit Economics¶

SaaS businesses have recurring revenue, making unit economics particularly important. For deeper SaaS-specific metrics and models, see Chapter 9: SaaS & Subscription Models.

Key SaaS Metrics:

MRR (Monthly Recurring Revenue) = Paying Customers × ARPU
ARR = MRR × 12

Net Revenue Retention (NRR):
NRR = (Starting MRR + Expansion - Contraction - Churn) / Starting MRR

Magic Number:
Magic Number = Net New ARR (Quarter) / S&M Spend (Prior Quarter)

Worked Example: Freshworks-Style SaaS

Metrics [Source: Freshworks public filings, adapted for illustrative purposes]:

Monthly ARPU: $100
Gross Margin: 82%
Monthly Churn: 2.5%
Expansion Revenue: 20% of existing base
CAC: $1,200 (fully loaded)

LTV Calculation:
Monthly Contribution = $100 × 0.82 = $82
Net Churn = 2.5% - (20%/12) = 0.83% monthly
LTV = $82 / 0.0083 = $9,880

LTV:CAC = $9,880 / $1,200 = 8.2:1
CAC Payback = $1,200 / $82 = 14.6 months

This shows a healthy SaaS business with strong LTV:CAC but longer payback typical of SMB SaaS.

Marketplace Unit Economics¶

Marketplaces have two-sided dynamics where unit economics must work for both supply and demand. For comprehensive marketplace economics, see Chapter 10: Marketplace & Platform Models.

Key Marketplace Metrics:

GMV (Gross Merchandise Value) = Total Transaction Value on Platform
Revenue = GMV × Take Rate
Contribution = Revenue - Variable Costs

Per-Transaction Unit Economics:
Contribution per Order = (Order Value × Take Rate) - Variable Costs

Worked Example: Food Delivery (Zomato-Style)

Per-order economics [Source: Zomato Annual Report FY24, https://www.zomato.com/investor-relations/annual-reports; Zomato Investor Presentations]:

Average Order Value: ₹400 (estimated based on public reports)
Take Rate: 22% (restaurant commission + platform fee)
Delivery Charge from Customer: ₹25

Gross Revenue per Order: ₹400 × 0.22 + ₹25 = ₹113

Variable Costs (estimated):
- Delivery Partner Payout: ₹65
- Payment Gateway (2%): ₹8
- Customer Support (allocated): ₹5
- Refunds/Errors (3%): ₹12
Total Variable Costs: ₹90

Contribution per Order = ₹113 - ₹90 = ₹23
Contribution Margin = 23 / 113 = 20.4%

At 18.4 million monthly transacting users [Source: Zomato Annual Report FY24] with ~3 orders/month:

Monthly Orders: 55.2 million (18.4M users * 3 orders)
Monthly Contribution: 55.2M × ₹23 = ₹126.96 Cr
Annual Contribution: ₹1,523.5 Cr

This must cover fixed costs (technology, corporate, marketing) for profitability.

D2C E-commerce Unit Economics¶

D2C brands face complex unit economics due to returns, COD, and high CAC. For D2C-specific business model patterns, see Chapter 13: E-commerce & D2C Models.

Worked Example: Fashion D2C Brand

MRP: ₹1,999
Average Discount: 30%
Net Selling Price: ₹1,399
Return Rate: 25%
RTO Rate: 8%
COD Percentage: 35%

Step-by-Step Calculation:

1. Effective Revenue (after returns):
   Gross Revenue: ₹1,399
   Return Adjustment: ₹1,399 × 25% = ₹350 (lost revenue)
   Effective Revenue: ₹1,399 × 0.75 = ₹1,049 per order shipped

2. COGS:
   Product Cost: ₹400
   Packaging: ₹40
   Total COGS: ₹440

3. Fulfillment Costs:
   Forward Shipping: ₹70
   RTO Shipping: 8% × ₹140 (forward + return) = ₹11
   Return Shipping: 25% × ₹80 = ₹20
   Total Fulfillment: ₹101

4. Payment Costs:
   Gateway Fee: 2% × ₹1,399 × 0.65 (prepaid) = ₹18
   COD Handling: 35% × ₹40 = ₹14
   Total Payment: ₹32

5. Contribution Margin 1:
   CM1 = ₹1,049 - ₹440 - ₹101 - ₹32 = ₹476
   CM1% = 476 / 1,049 = 45.4%

6. CAC (assuming ₹350 blended):
   CM2 = ₹476 - ₹350 = ₹126
   CM2% = 126 / 1,049 = 12.0%

This D2C brand earns ₹126 contribution per order after CAC. With average customer purchasing 2.5 orders lifetime:

Customer LTV = ₹476 × 2.5 = ₹1,190
LTV:CAC = ₹1,190 / ₹350 = 3.4:1

Fintech Unit Economics¶

Fintech unit economics depend heavily on the specific model (payments, lending, brokerage). For detailed fintech business models, see Chapter 12: Fintech & Payments Models.

Worked Example: PhonePe Transaction Economics

Per-transaction economics [Source: PhonePe Annual Report FY24, https://www.phonepe.com/webstatic/6564a1200a020b2c29990200/PhonePe_Annual_Report_FY24.pdf; NPCI Data, December 2024, as reported by Business Standard, "UPI transactions hit fresh high of 16.73 bn in Dec", Jan 2025]:

Average Transaction Value: ₹800
UPI MDR: 0% (zero for person-to-merchant)
Effective Revenue Sources (FY24 estimates):
- Cross-sell (insurance, mutual funds): ₹0.50 per transaction (average)
- Advertising: ₹0.20 per transaction
- Bill Payments Margin: ₹0.30 per transaction
Effective Revenue per Transaction: ₹1.00

Variable Costs (estimated):
- Technology Infrastructure: ₹0.15
- Customer Support: ₹0.10
- Bank Charges: ₹0.05
Total Variable Cost: ₹0.30

Contribution per Transaction: ₹0.70

At 16.73 billion transactions (December 2024 annualized) [Source: NPCI Data, December 2024]:

Annual Transactions (extrapolated): ~200 billion
Annual Contribution: 200 billion × ₹0.70 = ₹14,000 Cr

This demonstrates how zero-MDR UPI can still generate significant contribution through adjacent monetization.

25.4 Improving Unit Economics: The Levers¶

CAC Reduction Strategies¶

1. Channel Optimization: Analyze CAC by channel and reallocate spend to efficient channels.

Current State:
Google Ads: CAC ₹600, 40% of customers
Meta Ads: CAC ₹400, 35% of customers
Organic: CAC ₹0, 25% of customers
Blended CAC: ₹360

Optimized State (shift 10% from Google to Meta):
Google Ads: CAC ₹600, 30% of customers
Meta Ads: CAC ₹400, 45% of customers
Organic: CAC ₹0, 25% of customers
Blended CAC: ₹180 + ₹180 + ₹0 = ₹360

Actually same - need to grow organic:
If organic grows to 35%:
Blended CAC: ₹180 + ₹140 + ₹0 = ₹320 (11% reduction)

2. Conversion Rate Improvement: Higher conversion from same traffic reduces effective CAC.

Current: 10,000 visitors × 2% conversion = 200 customers
CAC = ₹100,000 spend / 200 = ₹500

Improved: 10,000 visitors × 3% conversion = 300 customers
CAC = ₹100,000 spend / 300 = ₹333 (33% reduction)

3. Referral Programs: Existing customers acquiring new customers at lower cost.

Referral CAC = Referral Reward / Customers from Referrals
If reward is ₹200 and 100 referrals convert:
Referral CAC = ₹20,000 / 100 = ₹200 vs. ₹500 paid CAC

4. Content and SEO: Long-term investment in organic acquisition.

LTV Expansion Strategies¶

1. Reduce Churn:

Current: 3% monthly churn, LTV = ₹1,600 × 33 = ₹52,800
Improved: 2% monthly churn, LTV = ₹1,600 × 50 = ₹80,000 (51% increase)

2. Increase ARPU: Through upselling, cross-selling, or price increases.

Current: ₹2,000 ARPU
Price increase: ₹2,200 ARPU (10% increase)
LTV increase: 10% (directly proportional)

3. Increase Purchase Frequency: For transaction businesses, more frequent purchases expand LTV.

Current: 2 orders/year, ₹500 contribution/order
LTV = 2 × ₹500 × 3 years = ₹3,000

Improved: 3 orders/year
LTV = 3 × ₹500 × 3 years = ₹4,500 (50% increase)

Contribution Margin Improvement¶

1. COGS Reduction: Through supplier negotiation, scale, or vertical integration.

2. Fulfillment Optimization: Route optimization, warehouse placement, carrier negotiation.

3. Returns Reduction: Better product descriptions, sizing guides, quality control.

4. Payment Optimization: Shift from COD to prepaid, negotiate gateway rates.

25.5 When Unit Economics Don't Apply¶

Unit economics are powerful but not universal. Several situations require different frameworks.

1. Network Effects Phase

When building network effects, customer-level unit economics may be intentionally negative.

Jio's ₹1.5 lakh Cr investment [Source: RIL Annual Reports 2016-2020] had negative unit economics for 2+ years. But each additional customer increased value for all customers, justifying the investment.

Framework: Instead of CAC:LTV, evaluate Network Value Creation:

Network Value = n² × Value per Connection

2. Land Grab / Winner-Take-All Markets

In markets trending toward monopoly, being #2 may be worthless.

Traditional Framework:
LTV:CAC = 2:1 → Don't invest more

Winner-Take-All Framework:
Expected Value of #1 Position = $10B
Expected Value of #2 Position = $500M
Additional $500M spend to secure #1: Worth it if success probability > 5%

3. Infrastructure Plays

Companies building infrastructure (AWS, Jio) have unit economics that only make sense at massive scale.

AWS's early years showed poor unit economics per server. At hyperscale, unit economics become extraordinary.

4. Long-Term Strategic Investments

R&D, brand building, and strategic partnerships don't have immediate unit economics.

Zerodha's Varsity (free financial education) has zero revenue but builds brand and customer acquisition funnel.

The Math of the Model¶

Cross-Reference: Cross-Reference: This chapter's analysis uses the D2C Unit Economics Model (Model 4) and Unit Economics Deep Dive (Model 13) from the Quantitative Models Master Reference.

Complete Unit Economics Calculation Suite¶

SaaS Unit Economics Template¶

Input Variables:

Calculations:

1. Monthly Contribution per Customer:
   MC = ARPU × GM
   = ₹5,000 × 0.80 = ₹4,000

2. Net Monthly Churn:
   Net Churn = Gross Churn Rate (c) - Expansion Rate (e)
   = 2% - 1% = 1%

3. Customer Lifetime (months):
   Lifetime = 1 / Net Monthly Churn
   = 1 / 0.01 = 100 months

4. Lifetime Value (LTV):
   LTV = Monthly Contribution (MC) × Customer Lifetime
   = ₹4,000 × 100 = ₹4,00,000

5. LTV:CAC Ratio:
   LTV:CAC = LTV / CAC
   = ₹4,00,000 / ₹50,000 = 8:1

6. CAC Payback Period (months):
   Payback = CAC / Monthly Contribution (MC)
   = ₹50,000 / ₹4,000 = 12.5 months

7. Magic Number:
   Net New ARR = New Customers (N) × ARPU × 12
   = 100 × ₹5,000 × 12 = ₹60,00,000
   Magic Number = Net New ARR / (S&M Spend from previous quarter)
   Assuming prior quarter S&M was ₹10,00,000/month × 3 = ₹30,00,000
   = ₹60,00,000 / ₹30,00,000 = 2.0

8. Rule of 40:
   Assuming 50% revenue growth and 15% EBITDA margin for the year.
   Rule of 40 Score = Growth Rate (%) + EBITDA Margin (%)
   = 50% + 15% = 65

Assessment:

Marketplace Unit Economics Template¶

Per-Transaction Model:

Input Variables:

Calculations:

1. Gross Revenue per Transaction:
   Revenue = (GMV × Take Rate) + Delivery Revenue
   = (₹1,000 × 0.15) + ₹50 = ₹150 + ₹50 = ₹200

2. Variable Costs per Transaction:
   Payment Cost = GMV × Payment Processing Rate = ₹1,000 × 2% = ₹20
   Delivery Cost = ₹60
   Support Cost = ₹10
   Refund Cost = GMV × Refund Rate × Take Rate (cost is lost revenue) = ₹1,000 × 5% × 15% = ₹7.50
   Total Variable Costs = ₹20 + ₹60 + ₹10 + ₹7.50 = ₹97.50

3. Contribution per Transaction:
   Contribution = Gross Revenue - Total Variable Costs
   = ₹200 - ₹97.50 = ₹102.50
   Contribution Margin % = (Contribution / Gross Revenue) × 100%
   = (₹102.50 / ₹200) × 100% = 51.25%

4. Buyer Unit Economics:
   Assume: Avg 12 orders/year, Buyer CAC = ₹300, 3-year lifetime
   Annual Contribution per Buyer = Orders per Year × Contribution per Order
   = 12 × ₹102.50 = ₹1,230
   LTV = Annual Contribution × Lifetime = ₹1,230 × 3 = ₹3,690
   LTV:CAC = LTV / CAC = ₹3,690 / ₹300 = 12.3:1

5. Seller Unit Economics:
   Assume: Avg ₹50,000 GMV/year, Seller CAC = ₹1,000, 5-year lifetime
   Annual Contribution per Seller = GMV × Take Rate × Contribution Margin %
   = ₹50,000 × 15% × 51.25% = ₹3,843.75
   LTV = Annual Contribution × Lifetime = ₹3,843.75 × 5 = ₹19,218.75
   LTV:CAC = LTV / CAC = ₹19,218.75 / ₹1,000 = 19.2:1

D2C Unit Economics Template¶

Full Waterfall Model:

A. Revenue Calculation
   1. MRP:                                     ₹2,000
   2. Less: Discount (25% of MRP):             (₹500)
      = ₹2,000 × 0.25
   3. Gross Selling Price (GSP):               ₹1,500
      = ₹2,000 - ₹500
   4. Less: Returns (20% of GSP):              (₹300)
      = ₹1,500 × 0.20
   5. Net Effective Revenue:                   ₹1,200
      = ₹1,500 - ₹300

B. Cost of Goods Sold (COGS)
   6. Product Cost:                             ₹350
   7. Packaging:                                 ₹45
   8. Total COGS:                               ₹395
      = ₹350 + ₹45

C. Fulfillment Costs
   9. Forward Shipping:                          ₹75
   10. RTO Cost (8% of orders × ₹150 ship cost): ₹12
       = 8% × (₹75 forward + ₹75 return)
   11. Return Shipping (20% of orders × ₹85 cost): ₹17
       = 20% × ₹85
   12. Total Fulfillment Cost:                  ₹104
       = ₹75 + ₹12 + ₹17

D. Payment Processing
   13. Gateway Fee (2% of GSP on 60% prepaid):   ₹18
       = 2% × ₹1,500 × 60%
   14. COD Handling (40% of orders × ₹35 fee):   ₹14
       = 40% × ₹35
   15. Total Payment Cost:                       ₹32
       = ₹18 + ₹14

E. Contribution Margin 1 (Pre-Marketing)
   16. CM1 = Net Revenue - COGS - Fulfillment - Payment
       = ₹1,200 - ₹395 - ₹104 - ₹32 = ₹669
   17. CM1 % = (CM1 / Net Revenue) × 100%
       = (₹669 / ₹1,200) × 100% = 55.8%

F. Customer Acquisition & Final Contribution
   18. Blended CAC:                              ₹400
   19. First Order CM2 = CM1 - CAC
       = ₹669 - ₹400 = ₹269
   20. First Order CM2 % = (CM2 / Net Revenue) × 100%
       = (₹269 / ₹1,200) × 100% = 22.4%

G. Lifetime Value Analysis
   21. Average Customer Lifetime Orders:          2.8
   22. LTV = CM1 × Lifetime Orders
       = ₹669 × 2.8 = ₹1,873.20
   23. LTV:CAC Ratio = LTV / CAC
       = ₹1,873.20 / ₹400 = 4.68:1
   24. Payback Period (in orders) = CAC / CM1
       = ₹400 / ₹669 = 0.6 orders (pays back on the first order)

Cohort Analysis Framework¶

Monthly Cohort Revenue Tracking:

Cohort Retention & LTV Calculation (Jan-24 Cohort):

Month 1 Retention = (Revenue M1 / (Cohort Size × ARPU)) = ₹50,000 / (1,000 × ₹50) = 100%
Month 12 Retention = (Revenue M12 / (Cohort Size × ARPU)) = ₹28,000 / (1,000 × ₹50) = 56%
Month 24 Retention = (Revenue M24 / (Cohort Size × ARPU)) = ₹18,000 / (1,000 × ₹50) = 36%

Step 1: Calculate Implied Monthly Churn from cohort data over 24 months.
Churn = 1 - (Ending Retention %)^(1 / Number of Months)
= 1 - (0.36)^(1/24) = 1 - 0.958 = 4.2%

Step 2: Calculate LTV using this churn rate.
Assume ARPU = ₹50 and Gross Margin = 80%
LTV = (ARPU × Gross Margin) / Implied Monthly Churn
= (₹50 × 0.80) / 0.042
= ₹40 / 0.042 = ₹952

Sensitivity Analysis¶

LTV Sensitivity to Churn:

CAC Sensitivity to Conversion Rate:

Case Studies¶

Zomato's Unit Economics Evolution¶

Timeline:

• Founded: 2008
• Key milestones:
• 2015: Entered food delivery.
• 2021: IPO on the Indian stock exchanges.
• 2022: Acquired Blinkit, a quick commerce company.
• 2024: Reported its first full year of net profit.
• Current status: A leading food delivery and quick commerce company in India.

Business Model:

• Value proposition: A platform for users to discover restaurants, order food, and get it delivered quickly.
• Revenue model: A mix of restaurant commissions, delivery fees, advertising, and a subscription program (Zomato Gold).
• Key metrics: Gross Order Value (GOV), revenue, net profit, monthly transacting users (MTU).

Strategic Analysis:

• Key decisions:
• Decision 1: Take Rate Optimization: Increased restaurant commissions as the platform became an essential marketing and sales channel.
• Decision 2: Delivery Efficiency: Invested in route optimization and order batching to reduce the cost per delivery.
• Decision 3: AOV Improvement: Introduced platform fees and minimum order values to increase the average order value.
• Decision 4: Blinkit Acquisition: Diversified into the quick commerce space to capture a larger share of the consumer's wallet.
• Market context: A large and rapidly growing food delivery market with intense competition.
• Competitive dynamics: Competes primarily with Swiggy in the food delivery space and with a growing number of players in the quick commerce market.

Financial Information:

• Unit economics: The company's per-order economics have improved significantly, moving from a contribution loss to a contribution profit.
• Funding history: Raised significant venture capital funding before its IPO in 2021.

What Worked / What Broke:

• Worked:
• Improved unit economics: The company successfully improved its per-order profitability through a combination of higher take rates, increased efficiency, and higher order values.
• Market leadership: Maintained its position as one of the leading food delivery platforms in India.
• Successful diversification: The acquisition of Blinkit has been a key driver of growth.
• Broke: The company faced a long period of heavy losses and cash burn before achieving profitability.

Lessons:

1. Unit economics in a platform business can be improved over time as the platform gains scale and network effects.
2. Operational efficiency and a focus on cost reduction are critical for success in a low-margin business like food delivery.
3. Diversification into adjacent categories can be a powerful driver of growth.

Sources:

1. Zomato Annual Reports FY22, FY23, FY24, https://www.zomato.com/investor-relations/annual-reports.
2. Zomato Investor Presentations Q4 FY24.

PhonePe's Transaction Economics¶

Timeline:

• Founded: 2015
• Key milestones:
• 2016: Launched as a UPI-based payments app.
• 2017: Became the largest UPI app by transaction volume.
• 2023: Raised $100 million at a $12 billion valuation.
• Current status: The leading digital payments platform in India, with a growing presence in financial services.

Business Model:

• Value proposition: A simple, fast, and secure way to make digital payments.
• Revenue model: A mix of bill payment commissions, advertising, and commissions from the sale of financial products like insurance and mutual funds.
• Key metrics: UPI market share, monthly transactions, revenue, operating loss.

Strategic Analysis:

• Key decisions:
• Decision 1: Zero-Fee Core: Accepted zero revenue on core UPI transactions to build a massive user base.
• Decision 2: Adjacent Monetization: Focused on monetizing its user base through a wide range of financial services and other products.
• Decision 3: Super-App Strategy: Expanded beyond payments to become a "super app" with a wide range of services.
• Decision 4: Market Share Focus: Prioritized market leadership and user growth over short-term profitability.
• Market context: A rapidly growing digital payments market, driven by the government's push for a cashless economy.
• Competitive dynamics: Competes with other large digital payment platforms like Google Pay and Paytm.

Financial Information:

• Unit economics: While the core UPI transaction is a zero-revenue product, the company generates revenue from a variety of adjacent services, which it is using to fund its path to profitability.
• Funding history: A subsidiary of Flipkart, which is owned by Walmart.

What Worked / What Broke:

• Worked:
• Zero-fee strategy: Successfully built a massive user base and became the market leader in UPI payments.
• Adjacent monetization: Has started to successfully monetize its user base through a variety of financial services.
• Super-app strategy: Has successfully expanded beyond payments into a range of other services.
• Broke: The company has incurred significant losses in its quest for market leadership, and the path to profitability is still a work in progress.

Lessons:

1. In a platform business, a zero-margin core can be a powerful way to acquire users and build a large network.
2. Adjacent monetization is a critical component of any zero-margin strategy.
3. Market leadership can provide a significant advantage in monetizing a user base.

Sources:

1. PhonePe Financial Disclosures FY24.
2. NPCI Monthly Data Reports.
3. Inc42 PhonePe Revenue Analysis.

Lenskart's Omnichannel Unit Economics¶

Timeline:

• Founded: 2010
• Key milestones:
• 2011: Launched online platform.
• 2014: Opened first offline store.
• 2022: Acquired a majority stake in Owndays, a Japanese eyewear brand.
• 2024: Reached near-profitability with a reported loss of just ₹10 Cr.
• Current status: India's largest eyewear retailer, with a growing international presence.

Business Model:

• Value proposition: Affordable, high-quality eyewear with a convenient omnichannel experience.
• Revenue model: A vertically integrated model that includes manufacturing, online retail, and a large network of physical stores.
• Key metrics: Revenue, gross margin, number of stores, online vs. offline sales mix.

Strategic Analysis:

• Key decisions:
• Decision 1: Vertical Integration: Invested in its own manufacturing facilities to control quality and costs.
• Decision 2: Omnichannel Strategy: Built a large network of physical stores to complement its online presence, providing customers with multiple touchpoints for purchase and service.
• Decision 3: Technology Adoption: Leveraged technology, including AI-powered eye testing and virtual try-on, to enhance the customer experience.
• Market context: A large and underserved eyewear market in India, with a mix of unorganized local opticians and a few organized retail chains.
• Competitive dynamics: Competes with traditional opticians, other organized retailers, and online-only players.

Financial Information:

• Unit economics: Benefits from high gross margins due to its vertically integrated model, which allows it to offset the costs of its physical store network.
• Funding history: Has raised significant funding from a variety of investors, including SoftBank, KKR, and Temasek.

What Worked / What Broke:

• Worked:
• Vertical integration: Enabled the company to offer high-quality products at affordable prices while maintaining healthy margins.
• Omnichannel strategy: Provided a seamless customer experience and built a strong brand presence.
• Technology adoption: Enhanced the customer experience and improved operational efficiency.
• Broke: The company's international expansion has been capital-intensive and has yet to achieve the same level of success as its Indian operations.

Lessons:

1. Vertical integration can be a powerful way to create a competitive advantage in a fragmented market.
2. An omnichannel strategy can be an effective way to build a strong brand and capture a larger share of the market.
3. Technology can be a key enabler of both customer experience and operational efficiency.

Sources:

1. Entrackr Lenskart FY24 Analysis, https://entrackr.com/2024/11/lenskart-reports-rs-5427-cr-revenue-and-rs-10-cr-loss-in-fy24/.
2. Lenskart Company Disclosures.
3. TechCrunch Lenskart Coverage.

Dunzo's Hyperlocal Challenges¶

Timeline:

• Founded: 2015
• Key milestones:
• 2017: Received funding from Google.
• 2021: Pivoted to focus on quick commerce with Dunzo Daily.
• 2023: Faced a severe cash crunch, leading to mass layoffs and a halt in most operations.
• Current status: In insolvency proceedings, with its future uncertain.

Business Model:

• Value proposition: On-demand delivery of anything, from groceries to packages.
• Revenue model: A mix of delivery fees, commissions from merchants, and revenue from its own dark stores (Dunzo Daily).
• Key metrics: Daily orders, cash burn, valuation.

Strategic Analysis:

• Key decisions:
• Decision 1: Broad Service Definition: Initially offered to deliver "anything from anywhere," which led to a focus on low-value orders.
• Decision 2: Failed Pivot: Attempted to pivot to a quick commerce model, but did so too late and without the necessary infrastructure to compete effectively.
• Decision 3: Capital Inefficiency: Raised significant funding but failed to fix its fundamental unit economics.
• Market context: A highly competitive hyperlocal delivery and quick commerce market in India.
• Competitive dynamics: Competed with a wide range of players, including Swiggy, Zomato (Blinkit), and Zepto.

Financial Information:

• Unit economics: The company's per-delivery economics were structurally unprofitable, with the cost of delivery consistently exceeding the revenue generated per order.
• Funding history: Raised over $485 million from investors including Google, Reliance Retail, and Lightbox.

What Worked / What Broke:

• Worked:
• First-mover advantage: Pioneered the hyperlocal delivery category in India and built a strong brand.
• Broke:
• Unsustainable unit economics: The business model was fundamentally flawed, with no clear path to profitability.
• Failed to adapt: The pivot to quick commerce was too little, too late.
• Capital inefficiency: The company burned through a significant amount of capital without fixing its core business model.

Lessons:

1. Unit economics must be viable at scale; a business model that loses money on every order will only burn cash faster as it grows.
2. First-mover advantage is worthless without a sustainable business model.
3. In a competitive market, a clear focus and efficient execution are critical for survival.

Sources:

1. Inc42 Dunzo Insolvency Coverage, 2024.
2. TechResearchOnline Dunzo Case Study.
3. Company filings and disclosures.
4. Inc42, "Dunzo Funding Rounds", accessed Nov 2025.
5. Inc42, "Dunzo: A Timeline Of Its Journey From Hyperlocal Delivery To Insolvency", Oct 2024.

Stripe's Zero-Margin Core with Adjacent Monetization (Global)¶

Timeline:

• Founded: 2010
• Key milestones:
• 2011: Launches payment API for developers
• 2016: Launches Atlas (incorporation service)
• 2020: Launches Treasury (banking-as-a-service)
• 2024: Revenue ~$18B, first year of significant profit
• Current status: World's most valuable private fintech ($65B valuation)

Unit Economics Model:

Stripe's core payments business operates on razor-thin margins:

The Strategic Insight:

Stripe recognized that payments alone couldn't sustain premium valuations. The adjacent monetization strategy:

1. Stripe Capital: Lending to merchants using transaction data for underwriting. Net interest margins ~8-12%.
2. Atlas: Incorporation services at $500/company. High margin, builds pipeline.
3. Treasury: Banking-as-a-service. Enables platforms to offer financial services; Stripe earns basis points on deposits.
4. Radar (Fraud): Premium fraud protection at $0.05-0.07/transaction. Pure software margin (70%+).

LTV Expansion Through Product Stack:

A merchant using only payments has ~$2,000 LTV. A merchant using payments + Capital + Radar + Treasury can exceed $50,000 LTV. The zero-margin core is the acquisition strategy; the product stack is the business.

Lessons:

1. Zero-margin cores can be strategic when they enable high-margin adjacent products.
2. Platform businesses should measure LTV across the full product stack, not individual products.
3. Data generated by zero-margin products (transaction patterns) enables high-margin offerings (lending, fraud).

Sources:

1. Stripe company disclosures and blog posts.
2. The Information, "Stripe's path to profitability" (2024).
3. a]16z Fintech analyses.

Shopify's Platform Unit Economics Evolution (Global)¶

Timeline:

• Founded: 2006
• Key milestones:
• 2015: IPO on NYSE
• 2020: COVID drives massive growth; revenue $2.9B
• 2022: Acquires Deliverr; invests in logistics (later reversed)
• 2024: Revenue $7.1B; margins recovering after logistics pivot

Unit Economics Transformation:

Shopify's economics have fundamentally shifted:

The Strategic Insight:

Shopify discovered that subscription-only models cap growth. The shift to Merchant Solutions (payments, shipping, capital) expanded TAM but compressed margins. The lesson: optimize for merchant success, not Shopify revenue per merchant.

Key Unit Economics:

• Average Revenue Per Merchant: ~$2,500/year (including solutions)
• Merchant Churn: ~5% annually (extremely low for SMB)
• LTV: ~$50,000 per merchant (over 20-year relationship)
• CAC: ~$300 (benefiting from word-of-mouth and content marketing)
• LTV:CAC: ~167x (exceptionally strong)

The "Merchant Success" Alignment:

Unlike marketplaces that extract value from merchants, Shopify's economics improve when merchants grow:

• Larger merchants pay more in subscription fees
• More GMV generates more payment processing revenue
• Successful merchants use more services (Capital, Shipping, POS)

Lessons:

1. Platform economics can shift from subscription to take-rate models to expand TAM.
2. Alignment between platform success and merchant success creates sustainable moats.
3. LTV calculations must account for merchant graduation (growing with you vs. churning to enterprise).

Sources:

1. Shopify Annual Reports 2020-2024.
2. Investor presentations and earnings calls.
3. Stratechery analysis on Shopify.

Square/Block's Multi-Business Unit Economics (Global)¶

Timeline:

• Founded: 2009
• Key milestones:
• 2013: Launches Cash App (P2P payments)
• 2015: IPO
• 2021: Acquires Afterpay ($29B); renames to Block
• 2024: Cash App reaches 57M monthly actives; revenue mix shifts

The Multi-Unit Ecosystem:

Block operates multiple business units with distinct unit economics:

The Strategic Insight:

Square/Block recognized that seller payments alone couldn't sustain growth. Cash App became the growth engine, with unit economics superior to the original business:

Cash App Unit Economics:

Cash App's extraordinary LTV:CAC comes from zero-cost core (P2P transfers) with high-margin adjacents:

• Cash App Card (interchange)
• Bitcoin trading (spread)
• Direct deposit (float income)
• Cash App Pay (merchant fees)

Ecosystem Synergies:

The multi-unit structure creates compounding effects:

• Square sellers can use Cash App for payouts
• Afterpay drives customers to Square merchants
• Shared identity verification reduces CAC across units

Lessons:

1. Multi-business unit economics can be superior to single-product models when synergies exist.
2. Zero-cost acquisition channels (virality) create exceptional LTV:CAC ratios.
3. Adjacent monetization (Card, Bitcoin) can exceed core product revenue.

Sources:

1. Block Annual Reports 2022-2024.
2. Investor Day presentations.
3. ARK Invest Cash App analysis.

Indian Context¶

Unit Economics in Indian Markets¶

India-Specific Considerations:

1. Price Sensitivity: Lower willingness to pay affects revenue per unit.
2. COD Dominance: Cash on delivery adds cost and return risk.
3. Return Rates: Fashion e-commerce sees 25-40% returns in India.
4. Tier ⅔ Economics: Different unit economics apply in non-metros.
5. Logistics Costs: Higher per-unit due to infrastructure.

Tier-Based Unit Economics:

Meesho's success comes from accepting Tier 3+ unit economics [Source: Meesho Investor Relations, "Annual Report 2023-24", Mar 2025, https://meesho.com/investor-relations/]:

• Nearly 80% of orders are from Tier 2+ cities.
• Zero commission enables lower prices for customers and suppliers.
• Reseller network reduces CAC.
• Logistics aggregation (Valmo) improves delivery economics.

Regulatory Considerations¶

Impact on Unit Economics:

1. GST: 18% on services affects marketplace take rates [Source: GST Council, "GST Rates - Services", accessed Nov 2025, https://gstcouncil.gov.in/gst-rates-services].
2. MDR Caps: Zero UPI MDR forces alternative monetization strategies for payments companies.
3. FDI Regulations: Inventory models are restricted for foreign-owned e-commerce entities.
4. Data Localization: Imposes additional infrastructure costs for payments companies.

Strategic Decision Framework¶

When to Prioritize Unit Economics¶

When to De-Prioritize Unit Economics¶

Decision Tree: Unit Economics Assessment¶

flowchart TD
    A[Is this a network effects business?] --> |Yes| B[Is the network established?]
    A --> |No| C[Is market winner-take-all?]
    B --> |Yes| D[Optimize unit economics]
    B --> |No| E[Focus on network growth]
    C --> |Yes| F[Evaluate strategic position]
    C --> |No| G[Unit economics must work]
    G --> H[LTV:CAC > 3?]
    H --> |Yes| I[Scale acquisition]
    H --> |No| J[Fix before scaling]

Common Mistakes and How to Avoid Them¶

Mistake 1: Using Blended CAC When Channels Differ Dramatically¶

The Error: "Our CAC is ₹400" when Google is ₹700 and organic is ₹0.

Corrective Action: Calculate channel-specific CAC and evaluate each channel independently.

Mistake 2: Ignoring Cohort Degradation in LTV¶

The Error: Using early cohort performance for all LTV calculations.

Warning Signs: Early customers (often enthusiasts) have higher LTV than later customers.

Corrective Action: Track cohort-specific LTV and use conservative estimates for new customer projections.

Mistake 3: Excluding Key Costs from Contribution Margin¶

The Error: Calculating CM without returns, RTO, or payment costs.

Corrective Action: Include ALL variable costs. If it scales with orders, it's variable.

Mistake 4: Confusing Gross Margin with Contribution Margin¶

The Error: "We have 60% gross margin so unit economics are great."

Corrective Action: Calculate full contribution margin including fulfillment, payment, and marketing.

Mistake 5: Assuming CAC Stays Constant with Scale¶

The Error: Modeling growth at current CAC levels.

Reality: CAC typically increases as you exhaust efficient channels and target less-interested customers.

Corrective Action: Model CAC degradation (10-20% increase annually) in growth projections.

Mistake 6: Ignoring Unit Economics Variance¶

The Error: Using averages when there's high variance.

Example: Average LTV is ₹10,000 but 20% of customers have ₹50,000 LTV and 80% have ₹0.

Corrective Action: Segment customers and calculate unit economics by segment.

Mistake 7: Not Accounting for Time Value of Money¶

The Error: 24-month payback treated same as 6-month payback.

Corrective Action: Discount future LTV or require faster payback for capital-constrained businesses.

Action Items¶

Exercise 1: Calculate Your Unit Economics¶

For your business (or a business you analyze):

1. Calculate CAC by channel
2. Calculate LTV using both formula and cohort methods
3. Build complete contribution margin waterfall
4. Calculate payback period

Exercise 2: Sensitivity Analysis¶

Using your unit economics:

1. Model LTV sensitivity to churn (1%, 2%, 3%, 4%)
2. Model CAC sensitivity to conversion rate
3. Identify which lever has greatest impact

Exercise 3: Cohort Analysis¶

If you have customer data:

1. Build monthly cohort retention curves
2. Calculate cohort-specific LTV
3. Identify cohort performance trends

Exercise 4: Competitor Unit Economics¶

For a competitor:

1. Estimate unit economics from public data
2. Compare with your metrics
3. Identify competitive advantages and vulnerabilities

Exercise 5: Unit Economics Improvement Plan¶

Create a 12-month plan:

1. Identify top 3 CAC reduction opportunities
2. Identify top 3 LTV expansion opportunities
3. Prioritize by impact and feasibility

Key Takeaways¶

1. Unit economics answer the fundamental question - Does this business make money on each customer/order, and can that scale? Positive unit economics + scale = profitability. Negative unit economics + scale = faster death.

2. LTV:CAC ratio is the most important metric - Below 3:1 signals problems; above 3:1 enables scaling. But understand the components: a 4:1 ratio with 24-month payback is very different from 4:1 with 6-month payback.

3. Contribution margin tells the real story - Include ALL variable costs: COGS, fulfillment, payment, returns, RTO. Many "profitable" businesses have negative contribution margin when fully loaded.

4. Industry context matters dramatically - SaaS with 80% gross margins can tolerate higher CAC than e-commerce with 30% margins. Compare within your industry.

5. Unit economics evolve over time - Zomato went from -₹30 to +₹45 contribution per order. Track improvement trajectory, not just current state.

6. Sometimes unit economics shouldn't drive decisions - Network effects phases, winner-take-all markets, and infrastructure investments follow different logic.

7. Cohort analysis reveals truth that averages hide - Early cohorts often perform better than later ones. Track cohort-specific metrics for accurate forecasting.

One-Sentence Chapter Essence: Unit economics is the discipline of ensuring that each customer, order, or transaction creates value, providing the foundation for sustainable growth and profitability.

Red Flags & When to Get Expert Help¶

Warning Signs Requiring Attention¶

1. LTV:CAC < 2:1 for sustained periods
2. CAC increasing faster than LTV
3. Contribution margin declining over time
4. Cohort quality degrading significantly
5. Unit economics only work at unrealistic scale
6. Key assumptions unvalidated (churn, retention, expansion)

When to Consult Advisors¶

References¶

Primary Sources¶

1. Zomato Limited. Annual Reports FY22, FY23, FY24. Mumbai: Zomato, 2022-2024.
2. PhonePe Financial Disclosures FY24. Bangalore: PhonePe, 2024.
3. Entrackr. "Lenskart FY24 Financial Analysis." Entrackr.com, 2024.
4. NPCI. Monthly Transaction Data Reports. New Delhi: NPCI, 2024.

Secondary Sources¶

1. Inc42. "Dunzo Insolvency: The Rise and Fall." Inc42.com, 2024.
2. Meesho. Annual Financial Disclosure FY24. Bangalore: Meesho, 2024.
3. Economic Times. "Zerodha FY24 Results." July 2024.
4. Freshworks Inc. SEC Filings and Investor Presentations. 2021-2024.

Academic Sources¶

1. Skok, David. "SaaS Metrics 2.0: A Guide to Measuring and Improving What Matters." ForEntrepreneurs.com, 2023.
2. Thiel, Peter. Zero to One: Notes on Startups. Crown Business, 2014.
3. Chen, Andrew. "The Cold Start Problem." Harper Business, 2021.

Related Chapters¶

• Chapter 24: Financial Acumen - Financial foundations for unit economics
• Chapter 9: SaaS & Subscription Models - SaaS unit economics deep dive
• Chapter 10: Marketplace & Platform Models - Marketplace economics
• Chapter 26: Pricing Strategy - Price impact on unit economics
• Appendix C: Quantitative Analysis Tools - Unit economics calculators

Navigation¶

Connection to Other Chapters¶

Prerequisites¶

• Chapter 24: Financial Acumen - Company-level financial analysis foundation
• Chapter 8: Revenue Models - Understanding how revenue model affects unit economics

Related Chapters¶

• Chapter 11: Zero-Margin Models - When core unit economics are intentionally zero
• Chapter 13: D2C Models - Detailed D2C unit economics application
• Chapter 9: SaaS Models - SaaS-specific unit economics metrics

Next Recommended Reading¶

• Chapter 26: Pricing Strategy - How pricing affects unit economics
• Chapter 27: Decision-Making Under Uncertainty - Applying unit economics to strategic decisions