What is it?
Unit-economics — a method used to determine the profitability of a business model by assessing its unit. Typically, unit-economics is applied to startups in order to identify how profitable their business models will be in practice. A business can be successful as long as a single unit of goods or services is profit-making.
This method allows you to see how much profit you gain from a customer flow. This flow consists of units each of which either makes profit or not. Once you calculate how much a unit brings in and what costs the company bears, you get the profit you are likely to generate by a certain date.
After results, it’s clear whether or not it’s worth scaling the startup up, attracting investors, increase the flow and deal margin.
It’s important to mind that not only a customer who paid can be seen as a unit (as a rule this refers to SaaS-based projects). For instance, for mobile apps this is a user and for online media — a subscriber. An item can also be taken as a unit.
Thus, unit-economics serves for the following purposes:
⁃ To identify the business profitability at the idea stage;
⁃ To assess the prospects for the company and understand if it is on the right track;
⁃ To determine the effectiveness of the key sales channels;
⁃ To work out a break-even point and calculate the investment return;
⁃ To understand how many customers you need to attract and find out how much each of them is going to cost;
⁃ Tell your investors about objective prospects of your startup.
When do you need unit-economics?
⁃ When launching a startup;
⁃ When planning scaling a business up;
⁃ As soon as you need investors;
⁃ When developing a market strategy.
Have you already calculated the unit-economics of your startup? Comment below ⬇️