In any business, understanding your data and knowing which data is valuable, helps manage risk, performance and value.
Understanding your unit economics begins this process. Unit economics simply evaluates how much profit you make from selling one unit of service or product. It’s easier to calculate in a very early-stage business but much harder in a growing, established business.
Listen to this podcast from The Money Show where Pavlo Phitidis outlines how to calculate your business’s unit economics:
Calculating your unit economics
Selling price per unit – variable cost to make that sale = contribution margin
Two calculations make this up including;
Your unit economics aids decision-making on almost all aspects of your business. It helps keep you focused on what counts and puts you in control of your growth and future value.
Unit economics helps you understand your business.
Understanding how many units you need monthly, weekly, daily to survive and breakeven
Here are two quick examples
If you had a tie shop and your average sale was one tie at an average sales price of $20, you can now understand your shop in terms of ties which are logical and tangible to the tie maker. For example, how many ties do you need to sell to breakeven in a month, week, day? That information is powerful in deciding when you need to market, how to structure the retail assistants’ incentives, when to run specials to move stock and many other such levers that affect survival and growth.
If you have a hair salon, what is your average sale and how many hairdo’s do you need to breakeven? This lets you improve training for your stylists to sell more colour, braids and higher value services if you are in an area with fewer clients. Alternatively, you might want to add more styling stations and stylists if in a high demand area.
As an investor, I always ask about the company’s unit economics – it helps separate story from value and gives valuable insight into understanding the extent that the founder understands their business.