Unit economics of Digital Products

3 min readAug 31, 2022

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For a business to make sense, it must, in the long run make more money than spend. That is, the Total Lifetime Value [TLV] of a customer should be more than the Customer Acquisition Cost [CAC] spent on them.
CAC — Done mainly through marketing, discounts and offers — $10–20 per user on avg. It helps with acquisition, activation, and referral activities.
TLV — Done mainly through product experience and support. It helps with retention and revenue activities.
CAC being 10–20% of TLV on avg, is good. If CAC has to be $10–20, TLV per user needs to be more than $100.
CAC for a new business may start high at 50% and go down over time.
Keeping existing users is cheaper than getting new ones.

Value — Discovery of information
Categories — Search engines, free content platforms
Examples — Google, Facebook, twitter, LinkedIn, Youtube
Orthogonal to customer needs, and may be combined with any of the remaining business models.
Revenue — $1–5 per user view / click
For a search engine charging $1/click, if lifetime of a business is 1 year, and their budget is $500, TLV is $6000. So for acquiring one such business CAC can be $1,200!
Compare this to the remaining models to see why the businesses using this business model are so successful!

Value — Discovery of products and services
Categories — Marketplaces, Financial services, Ride hailing, e-commerce
Examples — App Store, Uber, Zerodha, Swiggy, Amazon
Revenue — 1–20% of transaction value
For an investment / payment platform charging 1% commission, an avg of 20 transactions a month of $5 each, if avg lifetime is 1 year per user, TLV is $12. So the CAC can only be $2.5.
For an e-commerce platform charging 20% commission, and avg of 5 transactions a month of $15 each, if avg lifetime is 4 years per user, TLV is $60. So the CAC can go up to $12.

Value — Content catalogue, Saas
Examples — Spotify, NYT, Headspace, Linear, Notion, AWS
Revenue — $1–10 per month
For a B2C service charging $1/month, if lifetime of customer is 6 months, TLV is $6. So for a user the CAC can only be $1.2.
For a B2B saas tool charging $10/month, if avg org-size is 20 people, a sale is worth $200 per month. If avg lifetime is 2 years, TLV is $4800. So to get one org of 20 people the CAC can be upto $1000!?