Unit Economics Explained: How to Tell if Your Startup Works

Unit economics compares what one customer brings you with what it costs to win and serve them. Work out the contribution margin per order, your customer acquisition cost (CAC), lifetime value (LTV) and how many months it takes to earn CAC back. A well-known software guideline puts strong businesses at an LTV above three times CAC.

I co-founded Hackhouse, a builders' hub in Nairobi. Growth charts are easy to make; the question that decides whether a startup survives is what each customer costs you and what they pay back. This guide gives the formulas, a worked example in shillings and a short test to run before your next raise. I checked every sourced fact on 5 November 2026.

What are unit economics?

Unit economics is the profit or loss on a single unit of your business. The unit might be one order, one subscription, one loan or one customer over their whole time with you. Software investor David Skok frames it as one question: can you make more profit from your customers than it costs to acquire them (For Entrepreneurs)?

If the answer is yes, growth makes you stronger. If it is no, every new customer adds to your losses, and more funding only delays the moment you have to fix it.

Which unit economics numbers should I calculate?

• Contribution margin per order: revenue from the order minus the direct costs of delivering it, such as goods, delivery, packaging and payment fees.
• Customer acquisition cost (CAC): total sales and marketing spend in a period divided by the new paying customers won in that period. Include salaries and agent commissions, as well as ads.
• Lifetime value (LTV): contribution margin per order, times orders per month, times the average number of months a customer stays.
• CAC payback period: CAC divided by the monthly contribution margin from one customer.
• Monthly churn: the share of customers who leave each month. Average lifetime in months is roughly 1 divided by monthly churn.

If you charge VAT, take it out of revenue first, since it belongs to KRA.

How do I calculate unit economics in shillings?

Here is an illustrative example for a Nairobi grocery delivery startup. The numbers are made up to show the method.

• Average order: KES 1,500.
• Goods: KES 900. Rider: KES 200. Packaging: KES 50.
• M-Pesa fee through a gateway at 1.5%: KES 22.50. Paystack's Kenyan rate for M-Pesa is 1.5% (Paystack pricing).
• Contribution margin per order: 1,500 minus 900, 200, 50 and 22.50, which leaves KES 327.50.
• Orders per customer per month: 2, so KES 655 a month per customer.
• Monthly churn: 12.5%, so the average customer stays about 8 months.
• LTV: 655 times 8, which is KES 5,240.
• CAC: KES 1,800 across ads, flyers and a first-order discount.

The LTV to CAC ratio is 5,240 divided by 1,800, about 2.9 to 1. Payback is 1,800 divided by 655, about 2.7 months. This business makes money on each customer, with little room for error. Raise the order size, cut churn or lower delivery costs and the ratio moves quickly. A first-order discount that grows unchecked can push it below 1.

What is a good LTV to CAC ratio?

In his SaaS Metrics 2.0 guide, first published in 2013, Skok writes that the best software businesses have an LTV to CAC ratio higher than 3, sometimes as high as 7 or 8, and that many of the best recover their CAC in 5 to 7 months (For Entrepreneurs). He also notes that many healthy businesses miss these guidelines in their early days.

Use those numbers as a reference point. They come from software companies with high gross margins. A logistics, retail or hardware business usually runs on thinner margins, so watch payback closely: the longer it takes to earn CAC back, the more cash you need to grow.

Why do African startups need their own unit economics?

• Acquisition often runs through people. Agents, field sales and word of mouth have costs that do not show up in an ads dashboard. Count them in CAC.
• Last-mile costs are high. Delivery, returns and failed deliveries come off every order.
• Income can arrive irregularly. Customers may buy in small amounts more often, which changes order size and frequency.
• Payment fees add up. A 1.5% M-Pesa fee on every sale is part of contribution margin.

Some models are built around this. M-KOPA lets customers pay for a smartphone daily, weekly or monthly and says consistent payers can access digital loans after three months (M-KOPA). Small, frequent payments and a second product offered to the same customer both change the lifetime value side of the sum.

How does funding hide bad unit economics?

A startup can raise a round, spend it on discounts and ads, and show fast top-line growth while losing money on each customer. The round buys time, and the loss on each customer is still there when the money runs out.

Lenders look at this closely. Partech counted US$1.6 billion of debt raised by African tech startups in 2025, 41% of all capital deployed, up from 31% in 2024 (Partech). Debt has to be repaid from cash flow, so it suits businesses whose units already make money. Our guide to what investors look for in African startups covers the wider picture.

How can I test my unit economics in 20 minutes?

1. What does it cost, fully loaded, to win one paying customer?
2. What is the contribution margin on one order or one month of subscription?
3. What is monthly churn, and is it rising or falling?
4. How many months until a customer pays back their CAC?
5. If all paid marketing stopped tomorrow, would customers still arrive?

If you cannot answer from your own data, that is your most urgent project. Pricing is often the fastest lever, and our guide to pricing for African markets helps. Growth-stage teams can work through this with peers on the Scale track of the Hackhouse Residency (KES 35,000, 12 weeks, no equity), and our communities are open to founders at any stage.

Key facts

• Unit economics compares the profit from one customer or order with the cost to win and serve it.
• LTV equals contribution margin per order times orders per month times average months retained.
• CAC payback equals CAC divided by monthly contribution margin per customer.
• David Skok writes that the best SaaS businesses have LTV to CAC above 3 and often recover CAC in 5 to 7 months.
• Debt was 41% of capital raised by African tech startups in 2025, according to Partech.
• Paystack charges 1.5% per M-Pesa transaction in Kenya.

Frequently asked questions

How do I calculate customer acquisition cost?

Add up all sales and marketing spend for a period, including salaries, agent commissions and discounts, and divide by the new paying customers won in that period.

How do I calculate lifetime value for a startup?

Multiply the contribution margin per order by orders per month and by the average months a customer stays. Use margin, because revenue overstates LTV.

What if my LTV to CAC ratio is below 1?

Each customer loses you money. Stop scaling paid acquisition, then raise prices or order size, cut delivery costs or reduce churn until the ratio is above 1 with room to spare.

Do unit economics matter before product-market fit?

Yes, but expect them to be rough. Track them from your first customers so you can see whether each change moves them the right way.

Sources

• SaaS Metrics 2.0: A Guide to Measuring and Improving what Matters, For Entrepreneurs (David Skok), checked 5 Nov 2026
• Pricing for Kenya, Paystack, checked 5 Nov 2026
• 2025 Partech Africa Tech VC Report, Partech, checked 5 Nov 2026
• M-KOPA home page, M-KOPA, checked 5 Nov 2026

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