Unit economics is a term that is often discussed, but when it comes to actually calculating it, the question arises: how exactly do I calculate the economics of my product?

The simplest way to understand unit economics is to realize what it tells us. It conveys a basic truth: your business must earn more from each unit than it spends on it. If this condition is met, your business has the potential to be successful. 

In the startup environment, a unit is currently understood to mean a customer. How much a business earns from a single customer is referred to as CLTV (Customer Lifetime Value), and the cost associated with acquiring that customer (usually marketing costs) is referred to as CLTC (or CAC, another common term). The ability to calculate these two metrics for your business, along with the ability to forecast them in the future, defines your unit economics.

Now let’s learn how to calculate CLTV and CLTC for your business. Let's start with the basics: CLTC (Customer Lifetime Cost) represents your marketing expenses over the lifetime of the customer. CLTV (Customer Lifetime Value) is the amount of money you earn from a customer. This metric is calculated using the formula:

CLTV = (AOV – COGS) × APC – 1sCOGS

For now, you can ignore the last element, 1sCOGS; we'll come back to it later. What do we see in the remaining part? (AOV – COGS) × APC is simply the gross profit from each transaction made by your customer during their lifetime with your product. 

AOV (Average Order Value) is the average amount a customer spends on your product. COGS (Cost of Goods Sold) is the cost you incur to produce and sell the product. APC (Average Payment Count) is the average number of times your customer makes a purchase. 

To calculate your unit economics, I recommend using the free basic unit economics template in ueCalc. You just need to register, select the "Basic Unit Economics Template," and create a document. Once in the document, you’ll see a table where you simply need to fill in the values of your unit economics metrics. 

The first cell is UA (Unit Acquisition), representing the number of potential customers in your business. The second is C₁, your conversion rate. If you don’t know the exact conversion rate, you can just enter the number of customers in the next cell, and ueCalc will calculate it for you. Next, fill in the values for AOV, COGS, 1sCOGS (just put 0 if you don’t have this metric), and APC, and ueCalc will automatically calculate your CLTV.

Finally, input your CLTC (or CAC) value, and ueCalc will automatically calculate your unit economics and display the result in the CM (Contribution Margin) cell. 

Now you can easily calculate your unit economics.