Unit economics is a critical concept in the world of business and finance. It involves analyzing the direct revenues and costs associated with a specific unit within a business. Understanding unit economics is essential for assessing the financial health of a business and making informed decisions to drive profitability and growth.
Unit economics refers to the direct revenues and costs associated with a specific business model, product, or customer on a per-unit basis. The basic goal of analyzing unit economics is to assess the financial viability and sustainability of a business by understanding the relationship between the costs incurred to acquire, serve, or produce a unit and the revenue generated from that unit.
The practices to keep unit economics accurate are:
SaaS (Software as a Service) companies track unit economics for several important reasons:
The unit economics are important because:
To calculate unit economics:
Determine what a "unit" represents in your context. Is it a customer, a product sold, a service rendered, or something else? Define this clearly.
Calculate the average revenue generated by a single unit (customer) over the entire duration of their relationship with your business. The formula for LTV can vary, but a basic formula is:
Calculate all direct costs associated with serving or acquiring this customer over their lifetime. This may include costs related to sales, marketing, customer support, and any other expenses directly tied to serving the customer.
Calculate the total cost incurred to acquire a new unit (customer). This includes expenses related to marketing, advertising, sales efforts, and any other activities aimed at bringing in new customers.
Compare the Customer Lifetime Value (LTV) to the Customer Acquisition Cost (CAC). The LTV:CAC ratio is a critical metric in unit economics.
A ratio greater than 1 indicates that the business is generating more revenue from a customer over their lifetime than it costs to acquire that customer, which is a positive sign.
A ratio less than 1 suggests that the cost of customer acquisition is higher than the expected revenue from that customer, which may indicate profitability challenges.
Unit economics helps to grow and improve your business in various ways:
These are short surveys that can be sent frequently to check what your employees think about an issue quickly. The survey comprises fewer questions (not more than 10) to get the information quickly. These can be administered at regular intervals (monthly/weekly/quarterly).
Having periodic, hour-long meetings for an informal chat with every team member is an excellent way to get a true sense of what’s happening with them. Since it is a safe and private conversation, it helps you get better details about an issue.
eNPS (employee Net Promoter score) is one of the simplest yet effective ways to assess your employee's opinion of your company. It includes one intriguing question that gauges loyalty. An example of eNPS questions include: How likely are you to recommend our company to others? Employees respond to the eNPS survey on a scale of 1-10, where 10 denotes they are ‘highly likely’ to recommend the company and 1 signifies they are ‘highly unlikely’ to recommend it.