Regardless of your business model, your unit economics are a simple yet powerful tool that can help you better understand the success and long term sustainability of your business.
The term unit economics describes a specific business model's revenues and costs in relation to an individual unit. A unit refers to any basic, quantifiable item that creates value for a business. Thus, your unit economics demonstrate how much value each item - or “unit” - generates for the business.
To make it more concrete: unit economics are your revenues per customer minus any costs associated with selling, which usually includes cost of goods sold and marketing, or customer acquisition cost
Understanding the drivers behind the unit economics of your business is one of the most crucial tasks before starting to scale your marketing & sales expenditures and thereby the growth of your company.
Consumer oriented Start-ups in Europe often look at the unit economics with the help of the contribution margin and split it into three or four levels (CM1, CM2, CM3, CM4):
- CM1 = revenue per customer - COGS per customer
- CM2 = CM1 - servicing / operating cost per customer (e.g. shipping, packing, etc.)
- CM3 = CM2 - acquisition cost per customer (e.g. online marketing spend)
- CM4 = CM3 - fixed costs / customer (often not applicable)
For any business you will normally want to make sure that you have a positive CM2, i.e. that the product you're selling or the service you're offering is profitable on a per unit basis. You may - if you have a business model where customers return multiple times over a given time period invest more into the acquisition cost of a single customer than you have as CM2 per customer, aiming to recover your acquisition after a number of purchases.
In case you're a SaaS or Marketplace start-up, please have a look at our specific section about
SaaS & Marketplace - Metrics and Benchmarks
There are many different metrics and abbreviations floating around in today's startup world. The more important it is to understand which specific metrics are relevant for your startup to keep track of. On top of that, industry benchmarks act as a helpful guideline to understand the actual metrics' impact.
At the Early Stage, Focus on Unit Economic Profitability, not Corporate Profitability
When asking pre-seed companies about their anticipated burn rates and cash spend over the following twelve months, I often get a boastful response along the lines of, "well, we're profitable now, it's just a matter of how much we want to spend".
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Haje Jan Kamps Contributor Share on Twitter Haje Jan Kamps is the director of portfolio at Bolt, a venture capital firm focused on hardware startups and enabling technologies. He was also a staff writer for TechCrunch. More posts by this contributor Runwise saves money and the planet by educating d...