Unit Economics

*example from Zomato (source)

Overview

Unit economics, also known as contribution margin, is the profitability associated with a single unit of measure for your product or service. Simply put, if your unit economic is positive, you will make money. If it’s negative, you will lose money.

If you’re a consulting business billing by hour, then your unit of measure can be one hour of work. If you’re a DTC snack brand, then your unit of measure can be one packaged snack. Whatever your business, you can identify your unit of measure then build your unit economics. Your unit economics can also vary based on your sales channel; some sales channels may have better unit economics than others.

To calculate your unit economics, you start out with your sales price per unit, and then subtract out all the costs associated with producing that one unit and getting it ready for sale, independent of your overhead. This article goes into more detail and specific calculations for SaaS and product-based businesses.

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