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Unit Economics

Unit economics refers to measuring the direct revenues and costs of a business on a per-unit basis, where a unit can be any quantifiable item like a product, service, customer, or transaction. Calculating unit economics allows businesses to understand the profitability of each unit and make informed decisions around pricing, profitability analysis, product development, marketing, and operations. There are two main approaches to calculating unit economics - defining the unit as a single item sold or defining it as acquiring a new customer. Understanding unit economics helps businesses determine their break-even point and set prices that are profitable.

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57 views9 pages

Unit Economics

Unit economics refers to measuring the direct revenues and costs of a business on a per-unit basis, where a unit can be any quantifiable item like a product, service, customer, or transaction. Calculating unit economics allows businesses to understand the profitability of each unit and make informed decisions around pricing, profitability analysis, product development, marketing, and operations. There are two main approaches to calculating unit economics - defining the unit as a single item sold or defining it as acquiring a new customer. Understanding unit economics helps businesses determine their break-even point and set prices that are profitable.

Uploaded by

Luan
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Unit Economics

BLOCK71 Saigon Booster Program - Funding Workshop

Prepared by
Truc Tran – Investment Manager
Email: truc.tran@doventures.vc
What is unit economics?
Unit economics refers to a particular business's direct revenues and costs measured on a per-unit basis. A unit
can be any quantifiable item that brings value to the business, such as a product, service, customer, or
transaction.
Unit economics is important because it allows businesses to understand each unit's profitability and make
informed decisions about allocating resources. For example, a business can use unit economics to determine
whether acquiring new customers, launching new products, or expanding into new markets is profitable.
- Chat GPT -

“Unit economics is a term used to describe the direct revenues and costs of a particular business measured on a

per-unit basis, where a unit can be any quantifiable item that brings value to the business. Calculating unit

economics makes it easier to forecast things such as break-even points and gross margins.”

- Bing Chat -
Why so important?
Unit economics analysis can be used to make a wide range of business decisions, including:
• Pricing: Unit economics analysis can help businesses to set prices that are both profitable and competitive.
For example, a business can use unit economics to determine the minimum price that it needs to charge for a
product to cover its costs and make a profit.

• Profitability Analysis: It helps determine how many units are required to make a business profitable
(breakeven point) and how much the units have to cost to earn their keep.
• Product development: Unit economics analysis can help businesses decide which products to develop and
which to discontinue. For example, a business can use unit economics to determine whether there is a market
for a new product and whether the product is likely to be profitable.
• Marketing: Unit economics analysis can help businesses to determine where to allocate their marketing
budget.
• Operations: Unit economics analysis can help businesses to improve their efficiency and reduce their costs.
For example, a business can use unit economics to identify areas where it can reduce its waste or streamline
its processes.

….and many more….


How to calculate?
Approach 1 – Unit defined as “One item sold/ successful transaction”

If a unit is defined as “one item sold,” a company can determine its revenue/cost balance using the
contribution margin. It is calculated as a difference between a price per item and variable costs per sale:
How to calculate?
Approach 1 – Unit defined as “One item sold/ successful transaction”

(23.88%) (6.44%
11.85 US$ (57.54%) 37.93% (20.49%) 17.44%
)
DEC 2022

AOV COGS CM1 Channel Costs, CM2 CM3


Better Unit Economics

Marketing Costs
Logistics, FFM &
Payment Costs

12.86 1.38%
(54.62%) 40.37% (16.09%) 24.28% (22.9%)
US$
JUN 2023

AOV COGS CM1 Channel Costs, CM2 Marketing Costs CM3


Logistics, FFM &
Payment Costs

12.88 3.51%
(52.7%) 42.16% (15.45%) 26.71% (23.2%)
US$
DEC 2023

AOV COGS CM1 Channel Costs, CM2 Marketing Costs CM3


Logistics, FFM &
Payment Costs
How to calculate?
Approach 2– Unit defined as “One customers”

Visualizing Unit Economics: Follow the Customer’s Lifetime


How to calculate?
Approach 2– Unit defined as “One customers”

CAC is the Cost of Acquiring a Paying Customer LTV/CAC Ratio - Rule of Thumb

<=1:1 You will lose money the more


you sell
LTV = [AOV x Purchase Frequency] x [Expected Customer
Lifetime Length] 3:1 “OK” ratio

4:1 Indicates a good business model


(on track of a sustainable biz)

>5:1 Likely under-investing in


marketing (you may be leaving growth on
the table)

* for reference only, this may vary by industry and


market
How to calculate?
Approach 2– Unit defined as “One customers”
Some LTV/CAC benchmarks to build a viable and sustainable business for specific industries
Source:
• SaaS 3:1 to 5:1 OpenView Partners https://openviewpartners.com/2023-product-
benchmarks/
CB Insights - https://openviewpartners.com/2023-product-
• E-commerce 3:1 to 4:1 benchmarks/
Recurly - https://newzoo.com/resources/trend-reports/pc-console-
gaming-report-2023
• Gaming 5:1 to 10:1
• Education 4:1 to 6:1
• Healthcare 4:1 to 5:1
• Financial services 3:1 to 4:1

* The above LTV/CAC ratio benchmarks are just averages of a specific sample dataset. The actual LTV/CAC ratio
that makes a business viable will vary depending on many factors, such as the business model, the target
market, and the competitive landscape.

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