What are "unit economics"?

• Lifetime value (LTV): the amount of revenue a single user generates during the entire duration of their usage of your service.

• Cost per acquisition (CPA): How much it costs to acquire a user.

What is Unit Economics

Unit Economics is the difference in value of the direct revenue and direct costs associated with that revenue acquisition, expressed on a per unit basis.

E.g. For an E-Commerce Company say FlipKart, the Unit economics would be expressed as difference in Life Time Value (LTV) of the customer and the cost associated with acquiring that customer.

You should note that in this example the LTV is the total revenue expected from a user which has already been acquired by the company, but in the case of e-commerce, the user needs to be acquired every time accompanying every sale (assuming people but large ticket item once every 2 years and do proper snooping on various competitor sites before making a purchase.  Thus the revenue made out of that sale from that customer – the cost associated with making that sale (adword expense, facebook expense, hosting expense etc) is the unit economics of that business.

Hi there!

Unit economics are basically the metrics of your business’ performance. They are quite specific to the business model that you have, meaning that the metrics you use are slightly different in SaaS as compared to an online marketplace for instance.

So what’s the difference with any other company performance measures, i.e. profitability or cash flow?

Well, when you are in the startup industry, positive performance metrics is difficult to achieve - especially in early stages of development.

This is where unit economics kicks in. 

Having positive unit economics metrics means having high potential and immediately turns your business into a viable investment opportunity.

Some of the most frequently used metrics are for instance Monthly recurring revenue (MRR). Customer Lifetime Value (CLV), Customer Acquisition Cost (CAC) and Churn rate. For a detailed overview of how to calculate them check out this post (there’s a video explaining the calculations with real examples, too) Unit Economics For Startups | Equidam.

Full Disclosure: I work for Equidam - Online valuation platform, who published the video and article.

Unit economics is defined as the “direct revenues and costs associated with a particular business model, and are specifically expressed on a per unit basis”. Some even go so far as say that unit economics are the fundamental or basic financial building blocks of a business. It is the starting point for management, outside analysts, investors, and other stakeholders to analyze, evaluate or assess a company's financial performance.

All businesses work around a financial model that is designed specifically according to their key assumptions and for the accomplishment of their organizational goals. A lot of resources go into making sure that all the bases are covered, from their product to the market that they are in. However, there is one other factor that should always be taken into account: the company’s economics, and if it is reasonable under the circumstances.

You can visit www.internetpadhai.com for more video tutorial related to various subjects like physics or maths or chemistry,etc and different topics.

Unit economics are the fundamental financial building blocks of a business. If you can pin down the unit economics, you can determine contribution margins, break-even points and perform ROI calculations all of which can help to determine whether a Company’s economic engine works. Without an understanding of unit economics, predicting whether a business can be profitable in the long-term is all guess-work.

I’m a believer that every business – no matter the scale – should have a point of view on its unit economics. That includes you startups. However, the concept is not as easy to apply as most hope and is frequently mis-applied.

I think none of them have attractive unit economics, and all of these companies are going to die sooner rather than later! Disruptive business models sometimes work (and history is always written in hindsight)... But basic economic principles always hold true. Here are my thoughts about the on demand economy and unit economics in general from my experience in entrepreneurship. The article will be very relevant to your question.

Dear Unit Economics, I hate you