Table of Contents
- What is unit economics?
- Theory of unit economics
- How to use unit economics
- Example of unit economics calculation
- Common mistakes in using unit economics
What is unit economics?
Unit economics is an important concept in business analytics that allows assessing the viability of sales. The essence of this model lies in the ratio of costs for one basic unit (unit) to the profit that this unit generates. Most often, the unit is represented by goods or services, as well as customers. This model is widely used in planning new sales directions, analyzing the current business, seeking investors, and developing marketing strategies.
Theory of unit economics
From an economic theory perspective, unit economics is defined by the relationship between marginal revenue (MR) and marginal costs (MC). Marginal revenue is the profit earned from selling each additional unit of goods, while marginal costs represent the changes in expenses arising from producing a new unit of goods. The increase in production continues until MR equals MC, after which further expansion will lead to losses.
How to use unit economics
To effectively apply unit economics, follow this algorithm:
- Define the unit. The choice of the unit depends on the specifics of the business:
- For mass sales through marketplaces, the unit will be a product.
- For subscriptions, it will be a customer.
- For large B2B deals, it will be a completed deal.
- Formulate the goal. The main directions for using unit economics include:
- Forecasting new business directions.
- Analyzing existing sales.
- Calculate costs and profit. Depending on the unit, use different methods:
- For a customer: calculate their lifetime value (LTV) and customer acquisition cost (CAC).
- For a product: consider production costs and margin.
Example of unit economics calculation
Let's consider a practical example. An entrepreneur plans to sell children's building blocks through a marketplace at a price of 1000 rubles per piece. Let's calculate the costs for one product:
- Purchase price: 200 rubles.
- Delivery cost of the batch: 10 rubles.
- Preparing the product for sale: 30 rubles.
- Advertising: 50 rubles.
- Marketplace commission: 200 rubles.
- Logistics delivery to the customer: 100 rubles.
- Tax (6%): 60 rubles.
The total cost is 650 rubles. The marginal profit per unit will be 35%. If the profitability is below 20%, the entrepreneur should consider optimization or even abandonment of the project.
Common mistakes in using unit economics
When calculating unit economics, it is important to avoid common mistakes:
- Incorrect accounting of costs: mixing fixed and variable expenses.
- Overestimating profitability: underestimating the impact of buybacks on profit.
- Ignoring seasonality: not accounting for demand fluctuations.
- Limiting analysis only to unit economics: better to combine it with other analysis methods.
- Focusing on a group instead of a specific unit: analysis should be conducted for each product separately.