Unit Economics
AdvancedUnit economics is the analysis of the revenue and costs associated with a single unit of a business, such as one customer, one order or one product, to judge whether the business model can be profitable as it grows.
Unit economics asks: does each unit make money? If a business loses money on every customer or sale, growing faster will only increase losses.
The unit depends on the business. For a subscription company, it is often one customer, measured by comparing customer lifetime value with the cost of acquiring the customer. For a delivery company, it might be one order, comparing the revenue per order with the costs of delivery, payment processing and packaging.
For example, if a product sells for 50 and the variable costs of making and delivering it are 30, each unit contributes 20 towards fixed costs and profit. If marketing costs 25 to win each sale, the business loses money on first purchases, so it relies on repeat purchases to become profitable.
Investors pay close attention to unit economics in start-ups. Positive unit economics, combined with the ability to scale, suggests a business could become profitable once it covers its fixed costs.
For worked examples and full lessons, visit notesbysara.org.