Are you earning good profits from your business? Well, possibly you might be. You have invested a good amount of money or your business initially acquired some million in VC, now you can generate more even after all the expenses. Appears like a success, right? So what will be your next step?
The unit economics metric, having easy calculations, will dictate the future of the business as well as help to understand the long-run sustainability. This allows you to take a microscopic look at your business’s dealings beyond cost and revenue. Sometimes –you can save from taking the unjustified scaling steps. Let me inform you how.
What’re Unit Economics & What Is Its Importance?
To understand in simple terms, unit economics is the measure of the possibility of selling and producing or offering a particular unit of the product and service. Suppose you are the widget company selling out widgets, unit economics can be the relationship between the revenue you get from selling the widget and other costs that are associated when making the sale. For the companies that providing such service, like Uber, unit economics is the relationship between its revenue from the service and costs linked with offering & servicing its customer.
At the high level, the point of the unit economics will be to know how much profit the business makes before the fixed costs so one will estimate how much the business has to sell to cover the fixed costs. Unit economics is the fundamental part of the breakeven analysis.
For the startups who still are in the growth mode, such type of analysis is very important. This charts the path that company will follow to wean the way off the external equity funding. As volumes rise, profits before the fixed costs tick up & to the right and cross paths with the fixed cost line.
Why you must track unit economics at the early startup stage?
If you start tracking the unit economics at the early startup stage, your chances will be better in establishing the company footing in the market as well as achieving the healthy growth curve. The founders are overly optimistic about this concept behind the business. One biggest startup killers are the “build it & they will come” kind of mindset.
Most of the startups launch without even putting much thought into the product-market fit, costing strategy, customer acquisition, the structure associated with the business model, and, good bookkeeping. All these factors —when ignored —will sink that the startup dream as the money begins to run out.
Understanding unit economics quite early on allows you to make long-term projections that accurately predict the revenue trajectory. At the early stage, you require a healthy growth rate, however, you have to be highly profitable.
Even with the perfect execution, acceleration of growth will be accompanied by the squeeze on its profit margins. Just by keeping a close eye on the key metrics, you will be able to measure, improve & align the marketing, product, and service, and go with the direction that you want to move for sustainability.