Unit Economics

Key Components of Unit Economics

• Revenue per unit: How much money you make from selling one unit.
• Cost per unit: How much it costs to produce and deliver that unit.
• Profit per unit: The difference between revenue and cost per unit.

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

Why Unit Economics Matter

Understanding unit economics is crucial because:

• It determines business viability: Are you profitable on a per-unit basis?
• It guides pricing strategies: Ensures prices cover costs and yield profit.
• It informs scaling decisions: Helps decide if your model is scalable.
• It’s key for investors: They evaluate companies based on healthy unit economics.

Unit Economics Example

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 there’s more to consider!

Advanced Unit Economics Concepts

Unit economics often includes two other important metrics:

• Customer Acquisition Cost (CAC): How much it costs to acquire a new customer.
• 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 ensuring the golden goose lays enough eggs to pay for its feed and still leave you with a profit! 🥚💰

How Businesses Use Unit Economics

Here are some practical applications of 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 remains 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 monitor continuously.