Unit Economics for Mobile Apps Explained

You can have millions of downloads and still go out of business.

Growth without profitability is just expensive vanity.

Unit economics tell you whether each user you acquire generates more value than they cost—the fundamental question that determines if your business is sustainable.

Here's how to calculate and optimize unit economics for mobile apps.

What Are Unit Economics?

Unit economics measure the profit or loss from acquiring and monetizing a single user.

The core question: "If I acquire one user, how much money do I make (or lose)?"

Key components:

1. LTV (Lifetime Value): Total revenue a user generates
2. CAC (Customer Acquisition Cost): Cost to acquire that user
3. Gross Margin: Revenue minus direct costs (servers, payments, content)
4. Payback Period: Time to recover CAC

When LTV exceeds CAC by a healthy margin (typically 3:1), your unit economics are positive and growth is sustainable.

When CAC exceeds LTV, you're losing money on every user. Growth accelerates failure.

The Core Unit Economics Metrics

1. LTV (Lifetime Value)

Formula: LTV = ARPU / Churn Rate

Or: LTV = Average Revenue Per User × Average Lifespan

Example (subscription app):

• Monthly ARPU: $8
• Monthly churn rate: 10% (0.10)
• LTV = $8 / 0.10 = $80

Example (ad-monetized app):

• Daily ARPU: $0.15
• Average lifespan: 90 days
• LTV = $0.15 × 90 = $13.50

What's good:

• Subscription apps: $30-$150+ LTV
• Gaming (IAP): $5-$50 LTV
• Ad-monetized: $2-$20 LTV

2. CAC (Customer Acquisition Cost)

Formula: CAC = Total Marketing Spend / Number of New Users

Example:

• Monthly marketing spend: $50,000
• New users acquired: 2,500
• CAC = $50,000 / 2,500 = $20

Note: Some teams include all costs (salaries, tools, overhead) in "fully loaded CAC." For unit economics, use direct marketing spend only.

What's good:

Depends on LTV. If LTV is $60, a $20 CAC (3:1 ratio) is excellent. If LTV is $25, a $20 CAC (1.25:1 ratio) is unsustainable.

3. LTV:CAC Ratio

Formula: LTV:CAC = LTV / CAC

This is the most important unit economics metric.

Example:

• LTV = $80
• CAC = $25
• LTV:CAC = $80 / $25 = 3.2:1

Benchmarks:

• Below 1:1 – Losing money on every user
• 1:1 to 2:1 – Breakeven to thin margins
• 3:1 – Industry standard for sustainable growth
• 4:1+ – Strong unit economics, room to scale aggressively

Why 3:1 is the target:

LTV measures revenue, not profit. After costs (servers, support, payments, salaries), you need margin. 3:1 provides buffer for operational expenses.

4. Payback Period

Formula: Payback Period = CAC / Monthly ARPU

Example:

• CAC = $20
• Monthly ARPU = $5
• Payback Period = $20 / $5 = 4 months

What's good:

• Subscription apps: 2-7 months
• Ad-monetized apps: 1-3 months
• Gaming (IAP): 3-12 months
• Target <12 months for most apps

Faster payback enables faster reinvestment and scaling.

5. Gross Margin

Formula: Gross Margin = (Revenue - Direct Costs) / Revenue

Example:

• Monthly revenue per user: $10
• Direct costs (servers, payment processing, content): $3
• Gross Margin = ($10 - $3) / $10 = 70%

Why it matters:

High gross margin (70%+) means you keep most of your revenue after costs. This improves true profitability beyond LTV:CAC ratio.

How to Calculate Your Unit Economics

Step 1: Calculate LTV

Track cohort revenue over time:

• Install 1,000 users in January
• Track cumulative revenue: Month 1, Month 3, Month 6, Month 12
• Divide total revenue by 1,000 to get LTV

For early-stage apps:

Use predicted LTV based on early revenue and retention curves.

Step 2: Calculate CAC

Sum all marketing spend (Meta, Google, TikTok, ASA, etc.) and divide by total new users acquired.

Track by channel:

• Meta CAC
• Google CAC
• TikTok CAC
• Blended CAC (all channels)

Different channels will have different CACs and LTVs.

Step 3: Calculate LTV:CAC Ratio

Divide LTV by CAC for each channel and blended.

Example:

Channel	LTV	CAC	LTV:CAC
Meta	$50	$18	2.8:1
Google	$60	$15	4.0:1
TikTok	$45	$22	2.0:1
Blended	$52	$17	3.1:1

Google has the best unit economics (4:1). TikTok is marginal (2:1).

Step 4: Calculate Payback Period

Divide CAC by monthly ARPU.

Step 5: Calculate Gross Margin

Identify direct costs:

• Server/hosting costs
• Payment processing fees (2-3%)
• Content delivery costs
• Third-party API costs

Subtract from revenue to get gross profit. Divide by revenue for gross margin %.

Unit Economics by Business Model

Subscription Apps

Target unit economics:

• LTV: $50-$150
• CAC: $15-$40
• LTV:CAC: 3:1 to 5:1
• Payback: 2-7 months
• Gross Margin: 70-85%

Example (meditation app):

• Subscription: $10/month
• Average subscription length: 8 months
• LTV = $10 × 8 = $80
• CAC = $22
• LTV:CAC = 3.6:1
• Payback = 2.2 months
• Gross Margin = 78%

Strong unit economics. Room to scale.

Ad-Monetized Apps

Target unit economics:

• LTV: $5-$20
• CAC: $1-$5
• LTV:CAC: 3:1 to 5:1
• Payback: 1-3 months
• Gross Margin: 50-65% (after ad network cuts)

Example (hyper-casual game):

• Daily ad revenue: $0.18
• Average lifespan: 60 days
• LTV = $0.18 × 60 = $10.80
• CAC = $2.50
• LTV:CAC = 4.3:1
• Payback = 1.5 months
• Gross Margin = 55%

Strong unit economics. Highly scalable.

In-App Purchase Apps

Target unit economics:

• LTV: $10-$100 (wide variance)
• CAC: $3-$30
• LTV:CAC: 2:1 to 4:1
• Payback: 3-12 months
• Gross Margin: 65-75%

Example (puzzle game):

• 5% of users make purchases
• Average purchase value: $15
• Purchase frequency: 2x per user lifetime
• LTV = $15 × 2 × 0.05 = $1.50
• CAC = $4.00
• LTV:CAC = 0.375:1

Negative unit economics. Not sustainable.

IAP apps often struggle with unit economics because only 2-5% of users pay. LTV needs to be much higher or CAC much lower.

How to Improve Unit Economics

Strategy 1: Increase LTV

Improve retention:

• Better onboarding (can lift retention 20-40%)
• Engagement loops (push notifications, streaks)
• Product improvements

Increase monetization:

• Optimize paywall timing
• Test pricing
• Add new revenue streams (ads + subscriptions)

Example:

• Improve Day 7 retention from 25% to 35%
• Average lifespan increases from 60 days to 90 days
• LTV increases 50%

Strategy 2: Reduce CAC

Improve creative:

• Test new hooks and formats
• Better targeting to high-intent audiences

Optimize app store page:

• Higher conversion rate = more installs per click = lower CAC

Shift to lower-cost channels:

• If Meta CAC is $25 and ASA CAC is $15, shift budget

Example:

• Improve creative CTR from 1.5% to 2.2%
• CPI drops 30%
• CAC drops 30%

Strategy 3: Improve Gross Margin

Negotiate better rates:

• Server costs
• Payment processing fees
• Ad network revenue shares

Example:

• Reduce server costs from $0.30/user to $0.20/user
• Gross margin improves from 70% to 73%

Small improvements compound over millions of users.

Strategy 4: Focus on High-Quality Channels

Not all users are equal. Some channels deliver 2x higher LTV.

Example:

• Apple Search Ads: $75 LTV, $18 CAC = 4.2:1
• TikTok: $45 LTV, $22 CAC = 2.0:1

Shift budget to ASA to improve blended unit economics.

When Unit Economics Are Good Enough to Scale

Scale when:

1. LTV:CAC ≥ 3:1 (industry standard)
2. Payback period ≤ 12 months (preferably 3-6 months)
3. Gross margin ≥ 60% (enough buffer for costs)
4. LTV is stable or growing cohort-over-cohort

If any of these are off, fix unit economics before scaling aggressively.

When Unit Economics Are Too Weak to Scale

Don't scale if:

• LTV:CAC < 2:1
• Payback period > 18 months
• LTV declining month-over-month
• Gross margin < 40%

Focus on:

1. Improving retention
2. Increasing monetization
3. Reducing CAC through better creative

Scale only after unit economics improve.

Unit Economics Red Flags

Red Flag 1: LTV Declining

If March cohort has $50 LTV and June cohort has $35 LTV, your product is weakening.

Action: Fix product before scaling UA.

Red Flag 2: CAC Rising Faster Than LTV

If CAC increases 40% but LTV only increases 10%, margins are compressing.

Action: Improve creative, targeting, or pause scaling.

Red Flag 3: Payback Period Exceeds User Lifespan

If payback is 15 months but users churn at 10 months, you never recover CAC.

Action: Improve monetization and retention before resuming UA.

Key Takeaways

• Unit economics measure profitability per user: LTV, CAC, LTV:CAC ratio, payback, gross margin
• Target 3:1 LTV:CAC ratio for sustainable growth; 4:1+ is strong
• Payback period should be <12 months, ideally 3-6 months
• Improve unit economics by increasing LTV (retention, monetization) or decreasing CAC (creative, targeting)
• Don't scale if LTV:CAC < 2:1 or payback > 18 months

FAQs

What are unit economics in mobile apps?

Unit economics measure the profitability of acquiring and monetizing a single user. Key metrics include LTV (Lifetime Value), CAC (Customer Acquisition Cost), LTV:CAC ratio, payback period, and gross margin. These determine if your app can grow profitably.

What is a good LTV:CAC ratio?

A sustainable LTV:CAC ratio is at least 3:1, meaning users generate 3x more revenue than they cost to acquire. Top-performing apps maintain 4:1 or higher. Below 2:1, margins are too thin for sustainable growth.

How do you calculate unit economics for mobile apps?

Calculate LTV (ARPU / Churn Rate), CAC (Marketing Spend / New Users), LTV:CAC Ratio (LTV / CAC), Payback Period (CAC / Monthly ARPU), and Gross Margin (Revenue - Direct Costs / Revenue). These metrics together show if growth is profitable.

Why does LTV:CAC need to be 3:1 instead of just above 1:1?

LTV measures revenue, not profit. After operational costs (servers, support, development, overhead), you need margin. 3:1 provides buffer for these costs and ensures sustainable profitability.

Can I scale with weak unit economics?

Scaling with weak unit economics (LTV:CAC < 2:1) accelerates failure. You burn cash faster without fixing fundamentals. Focus on improving retention and monetization before scaling aggressively.

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Unit economics are the foundation of sustainable growth. Get them right, and you can scale confidently. Ignore them, and growth becomes a liability.