Basics of unit economics. Part 1: What is unit economics and why understanding it is important to your business?
Today we are starting a series of posts about unit economics. We’ve prepared all the necessary information that will help you to be 100% ready for our free webinar on unit economics on March 22.
You will find out what it is and why it’s so important for everyone involved in the business to understand unit economics. Moreover, we will teach you how to calculate all the basic metrics.
But let’s start with the terminology.
Unit economics, in general, is a profit/loss calculation per customer. This is an aggregate indicator that determines whether there is a financial sense in scaling the project and where the project has a break-even point.
Another definition of unit economics is the direct revenues and costs associated with a particular business model, and are specifically expressed on a per unit basis. Some experts even say that unit economics are the fundamental or basic financial building blocks of a business.
Unit economic is the starting point for management, outside analysts, investors, and other stakeholders to analyse, evaluate or assess a company’s financial performance. Potential investors will certainly ask about this indicator, and you also need to know it to make the right decisions on the project.
All businesses work around a financial model that is designed specifically according to their key assumptions and for the accomplishment of their organisational goals. A lot of resources go into making sure that all the bases are covered, from their product to the market that they are in. However, there is one other factor that should always be taken into account: the company’s economics, and if it is reasonable under the circumstances.
Startups or companies that are relatively new and just getting off the ground are sure to feel daunted by the thought of having to look into the economics of their financial model. That is why unit economics is very helpful. This way, the intimidating and seemingly large and long-winding process is broken down into smaller, more manageable tasks.
By using a unit economics model, work can be divided, attention can be distributed equally among all the important points, and the job can be done.
By gaining an understanding of unit economics,
- The key points of a business’ financial model will make more sense;
- Management will have an easier time determining break-even points and contribution margins, to aid in decision-making;
- Calculation of return on investment and other profitability tests will be facilitated; and
- Forecasting or predicting the future profitability of the company will be easier.