Unit Economics for digital creators | Blog

While chasing growth is essential, it should never come at the cost of understanding unit economics. Profitable growth is the holy grail of sustainable business.

Sheryl Sandberg, COO of Facebook

As a digital content creator, you are running a business, and like any business, growth matters—but it should be profitable growth. Whether you're selling courses, e-books, or other online products, understanding your unit economics is key to sustainability.

Unit economics refers to the profit or cash flow generated per customer. This allows you to estimate the lifetime value of each customer and compare it against the cost of acquiring them. Armed with this knowledge, you can make smarter decisions about pricing, marketing, and scaling your business.

What Are Unit Economics?

Unit economics helps you understand how much profit you make on a per-unit basis, typically per customer or per sale. Analyzing these numbers helps you figure out if your business is profitable and how much you can spend on acquiring new customers while remaining profitable.

For digital content creators, unit economics revolves around four main metrics:

Revenue: Income generated per customer or sale.
Gross Profit: Revenue minus direct costs, such as platform fees and payment processing.
Customer Acquisition Cost (CAC): The cost to acquire each new customer.
Customer Lifetime Value (LTV): The total profit you expect to earn from a customer over their entire relationship with your business.

By comparing LTV with CAC, you can evaluate the financial health of your business and discover opportunities for optimization.

Step 1: Calculate Gross Profit

To begin, calculate your Gross Profit. This is the revenue left after covering the costs directly tied to creating and delivering your digital content (e.g., hosting fees, platform costs, and production expenses).

With Sherpo, many infrastructure costs are simplified, so calculating gross profit becomes much easier.

Components of Gross Profit

Software and Platform Fees: Sherpo’s usage-based pricing or subscription fees.
Payment Processing Fees: Commissions from Stripe, PayPal, etc.
Content Creation Costs: Time, tools, freelancers, and even opportunity costs for your own time.

Gross Profit Formula

\text{Gross Profit} = \text{Revenue} \times \text{Gross Profit Margin}

Example Calculation

Let’s say you sell a course for $100 on Sherpo Flex. Sherpo charges 5%, and Stripe takes around 3%, leaving you with a gross profit margin of 92%. Therefore:

\text{Gross Profit} = \$100 \times 92\% = \$92 \text{ per customer}

Unit Economics Table

Metric	Value	Description
Revenue per Unit	$100	Price of the course
Cost per Unit	$8	Sherpo's fee (5%) and Stripe's processing fee (3%)
Gross Profit	$92	Revenue minus costs
Gross Margin	92%	Gross Profit / Revenue

Step 2: Estimate Lifetime Value (LTV)

Once you know your gross profit, the next step is estimating your Customer Lifetime Value (LTV). LTV represents the total profit a customer will generate over their relationship with your business.

Components of LTV

Average Revenue Per User (ARPU): How much your customers typically spend.
Average Gross Margin per User: The gross margin left after direct costs.
Customer Churn Rate: The rate at which customers stop buying from you or cancel subscriptions.

LTV Formula

\text{LTV} = \text{ARPU} \times \text{Gross Margin} \times \text{Average Customer Lifetime}

Beware! A common mistake entrepreneurs make is forgetting to consider the direct costs involved per user.

Example Calculation

Let’s say your average customer spends $15 per month, your gross margin is 92%, and your churn rate is 10%, meaning customers typically stay with you for 10 months. So, your LTV would be:

\text{LTV} = \$15 \times 0.92 \times 10 = \$138

Tip: Many creators overlook cross-sells and upsells when calculating LTV. If you anticipate that 20% of customers will purchase additional content, you can increase your LTV to account for these potential sales.

Step 3: Compare LTV to Customer Acquisition Cost (CAC)

Now that you have your LTV, it’s time to compare it to your Customer Acquisition Cost (CAC), which represents how much you spend to bring in each new customer.

CAC Formula

\text{CAC} = \frac{\text{Total Marketing Spend}}{\text{Number of New Customers Acquired}}

If you want more details on Customer Acquisition Costs, check out our dedicated blog post!

Example Calculation

Let’s assume you spend $2,000 on Instagram or Facebook Ads and acquire 100 customers. Your CAC is:

\text{CAC} = \frac{\$2,000}{100} = \$20 \text{ per customer}

If you are leveraging Sherpo's affiliate marketing, you should use the referral fee as your CAC. The power of affiliates, of course, is that you are always sure you will break-even on a unit economics basis!

Step 4: Analyze and Optimize

The goal is for your LTV to be significantly higher than your CAC. A general rule of thumb is for LTV to be at least 3 times your CAC, but anything above 1 is generally fine and 2 is not bad either. But if your LTV is too low, it’s time to look for optimization strategies.

Optimization Strategies

Increase Your LTV:
- Add value with cross-sells and upsells, e.g., with bundles.
- Increase your value proposition, e.g., using Sherpo's AI tools. Don't forge that you can also use Sherpo’s AI tools to get personalized recommendations based on purchasing patterns.
Reduce Your CAC:
- Focus on more cost-effective marketing channels and enhance your SEO.
- Leverage Sherpo’s affiliate marketing and the power of incentives.
Reduce Churn:
- Boost customer retention by offering ongoing value and personalized support.
- Build a loyal community and use feedback to enhance your products.

A small secret: we asked our AI to suggest these generic optimization strategies!

Example of a Strong Unit Economics Scenario

Let’s break down an example:

Metric	Value
Revenue per Customer	$15
Gross Profit Margin	92%
LTV	$138
CAC	$20
LTV:CAC Ratio	6.9:1

In this case, the LTV (USD 138) is significantly higher than the CAC (USD 20), resulting in an LTV:CAC ratio of 6.9:1. This means the business can scale profitably while still investing in customer acquisition.

Subscriptions and Fixed Costs

In a subscription-based model, fixed costs such as platform subscriptions and production overhead complicate calculations.

Make sure you generate enough gross profit to cover these costs before calculating overall profitability. Want to know more? Check out our blog post on understanding profit margins.

Conclusion: The Power of Unit Economics for Digital Creators

Mastering unit economics is crucial for building a profitable and sustainable digital content business. By understanding your gross profit, calculating LTV, and comparing it to CAC, you can make data-driven decisions to optimize your business model.

With Sherpo’s AI-powered platform, you can easily streamline this process, optimize your marketing campaigns, and boost your LTV with cross-sells and upsells. The better you understand your unit economics, the more scalable and successful your digital content business will become.

Ready to take control of your unit economics?
Start selling with Sherpo and watch your revenue grow!