Unit Economics

Unit economics is all about understanding the revenues and costs associated with a single unit (customer) of your product or service. It’s the building block of your business’s financial health.

Here’s what unit economics typically includes:

• Revenue per unit: How much money you make from selling one unit

• Cost per unit: How much it costs you to produce and deliver that unit

• Profit per unit: The difference between revenue and cost per unit

👆 By the way, an interesting fact: The concept of unit economics gained popularity during the dot-com boom of the late 1990s. Investors started asking startups, “Sure, you’re growing fast, but are you making money on each sale?”

Understanding unit economics is crucial because:

1. It helps determine if your business model is viable

2. It guides pricing strategies

3. It informs decisions about scaling the business

4. It’s a key metric for investors evaluating a company

Let’s break it down with a simple example. Imagine you’re running a subscription box service for gourmet coffee ☕:

• Monthly subscription price: $30

• Cost of coffee beans: $10

• Packaging and shipping: $5

• Customer service and overhead: $5

Your unit economics would look like this:

• Revenue per unit: $30

• Cost per unit: $20 ($10 + $5 + $5)

• Profit per unit: $10

In this case, you’re making $10 profit on each subscription. Sounds good, right? But wait, there’s more to consider!

Unit economics often includes two other important concepts:

1. Customer Acquisition Cost (CAC): How much it costs to acquire a new customer

2. Customer Lifetime Value (LTV): How much revenue a customer generates over their entire relationship with your business

For a healthy business model, you typically want your LTV to be at least 3 times your CAC. It’s like making sure the golden goose lays enough eggs to pay for its feed and still leave you with a profit! 🥚💰

Here are some ways businesses use unit economics:

• Pricing decisions: Ensuring prices cover costs and provide desired profit margins

• Product development: Focusing on products with favorable unit economics

• Marketing strategies: Balancing customer acquisition costs with lifetime value

• Scaling decisions: Determining if the business model will remain profitable at scale

Remember, unit economics can vary over time and across different customer segments. It’s not a one-and-done calculation, but something to keep an eye on continuously.