The unit economics or unit economy They are a fundamental tool for analyzing the profitability and growth potential of any business. It is about measuring the income and direct costs associated with each unit of value generated by the business, be it a product sold, a customer acquired, a service provided, etc.
These metrics allow you to know the gross margin per unit, the break-even point, the return on investment in marketing and sales, and the long-term viability of your business model. In addition, they help you make better strategic decisions, optimize your resources and scale your business sustainably.
How to calculate and improve the unit economics of your business?
Here we give you five tips that will be of great help:
1. Define your unit of value
The first thing you should do is define what adds value to your business and your customers. This will depend on the type of business you have, but some examples are:
- If you sell physical or digital products, your unit of value will be each product sold.
- If you offer subscription or membership services, your unit of value will be each customer who pays a monthly or annual fee.
- If you are a platform that connects users with providers, your unit of value will be each transaction made between them.
Once you are clear about your unit of value, you can calculate the income and costs associated with it.
2. Calculate the revenue per unit
Unit revenue is the amount of money you receive for each unit of value you create. To calculate it, you must divide the total revenue by the number of units sold or purchased in a given period.
For example, if you sell shoes for 50 pesos a pair and you sell 100 pairs in a month, your income per unit will be:
- Revenue per unit = Total revenue / Number of units
- Income per unit = 5000 pesos / 100 pairs
- Income per unit = 50 pesos
3. Calculate the cost per unit
Cost per unit is the amount of money you spend to produce or acquire each unit of value. To calculate it, you must add all direct costs related to the unit and divide by the number of units sold or purchased in a given period.
Direct costs are those that vary based on the number of units, such as material cost, manufacturing cost, shipping cost, customer acquisition cost (CAC), etc.
For example, if you spend $10 on materials to sell a pair of shoes, $5 on manufacturing, $3 on shipping, and $2 on marketing and sales, your Cost per Unit would be:
- Cost per unit = (Material cost + Manufacturing cost + Shipping cost + Procurement cost) / Number of units
- Cost per unit = (10 pesos + 5 pesos + 3 pesos + 2 pesos) / 1 pair
- Cost per unit = 20 pesos
4. Calculate the gross margin per unit
Gross margin per unit is the difference between revenue per unit and Cost per unit. That is to say, It is the amount of money you earn for each unit of value you create. To calculate it, you must subtract the Cost per unit from the revenue per unit.
For example, if you sell a pair of shoes for 50 pesos and it costs you 20 pesos to produce or acquire it, your gross margin per unit will be:
- Gross margin per unit = Revenue per unit – Cost per unit
- Gross margin per unit = 50 pesos – 20 pesos
- Gross margin per unit = 30 pesos
5. Optimize your unit economics
Once you have calculated your unit economics, you can assess whether your business is profitable or not. To do this, you must compare your gross margin per unit with your Total Fixed Cost, which is the sum of all expenses that do not depend on the number of units, such as rent, salaries, taxes, etc.
If your gross margin per unit is greater than your Total Fixed Cost, your business is profitable. Nevertheless, if it is less, your business is losing money. If it is the same, your business is at the break-even point, that is, it does not earn or lose money.
To improve your unit economics, you must find ways to increase your revenue per unit or decrease your Cost per unit, or both. Some strategies that you can apply are:
- Increase the price of your product or service, as long as it does not affect the demand or the satisfaction of your customers.
- Offer discounts or incentives for recurring purchases or referrals, to retain your customers and increase their lifetime value (LTV).
- Reduce the cost of materials or manufacturing, looking for cheaper or more efficient suppliers, or improving the design or quality of your product.
- Reduce the cost of shipping, negotiating better rates with transport companies or offering store pick-up options or delivery points.
- Reduce the Cost of Customer Acquisition, optimizing your marketing and sales campaigns, better segmenting your target audience, or taking advantage of word of mouth or social networks.
- Reduce the Total Fixed Cost, eliminating unnecessary expenses or negotiating better conditions with your suppliers or lessors.
As you can see, unit economics are a very useful tool to understand and improve your business. We encourage you to calculate and review them periodically to ensure that your business is profitable and has growth potential.
How can a digital marketing consultant help you optimize your unit economics?
A digital marketing consultancy can help you optimize your unit economics in various ways, depending on your type of business, your revenue model, your market segment, and your goals.
Some of the ways in which a digital marketing consultant can help you are:
- Designing and implementing a digital marketing strategy that adapts to your value proposition, your target audience, your budget and your goals.
- Optimizing your digital advertising campaigns in the main digital media, such as Google and social networks.
- Improving the organic positioning of your website in search engines through SEO techniques (Search Engine Optimization).
- Implementing digital tools that streamline and automate the business process, such as a CRM (Customer Relationship Management) or an Inbound Marketing platform.
- Analyzing the key data and indicators of your business, such as LTV, CAC, payback, gross margin per unit, break-even point, etc.
Moses Hamui Abadi Graduated from Industrial Engineering, he always showed interest, vision and taste for business and numbers. He is the founder of MHA Consulting, dedicated to growing and empowering digital businesses.