Crunching the Numbers: How to Understand and Optimise Unit Economics for Your Small Business

Banke Ajayi
4 min readApr 3, 2023

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Photo by Mika Baumeister on Unsplash

As a small business owner, you want to make informed decisions that lead to success. But how do you know which decisions to make? One crucial piece of the puzzle is understanding your unit economics.

Unit economics is the measurement of the profitability of a single unit of your product or service. It’s a way to understand the relationship between the cost of producing or providing your product and the revenue you generate from selling it.

In this post, we’ll explore how to calculate and analyse your unit economics, and then look at some strategies for optimising your unit economics to increase profitability.

Understanding Unit Economics

Unit economics is the study of the costs and revenues associated with selling a single unit of your product or service. This includes everything from the cost of materials or ingredients to the cost of labour to produce or provide the product, as well as any fixed costs like rent or equipment.

Unit economics is not just about costs. It’s also about revenue. Specifically, it’s about the revenue generated by selling a single unit of your product or service. This revenue can come from a variety of sources, including sales of the product itself, any associated services or add-ons, or even advertising or referral fees.

Why is unit economics important? For starters, it can help you make better decisions about your business. By understanding the costs and revenues associated with selling a single unit of your product or service, you can make more informed decisions about pricing, marketing, and production.

But perhaps more importantly, unit economics can help you understand the overall health of your business. By tracking your unit economics over time, you can see whether your business is becoming more or less profitable. You can also use unit economics to compare the profitability of different products or services, or to identify areas where you might be overspending or underselling.

Calculating Unit Economics for Your Small Business

To calculate your unit economics, you need to identify all of the costs associated with producing or providing your product or service. This might include the cost of materials or ingredients, labour, fixed costs like rent or equipment, and variable costs like shipping or marketing expenses.

Once you’ve identified all of your costs, you can calculate the cost of producing or providing a single unit of your product or service. Next, you need to calculate the revenue generated by selling a single unit of your product or service. Finally, you can calculate your unit profit by subtracting the cost from the revenue.

Analysing and Optimising Unit Economics

Analysing your unit economics is important to identify areas where you might be overspending or underselling. If your unit margin is lower than you would like, you might want to look for ways to reduce your costs or increase your prices. On the other hand, if your unit margin is high, you might want to look for ways to scale up production or expand into new markets.

To optimise your unit economics, you can focus on increasing your unit revenue by offering premium versions of your product or service, adding new products or services to your lineup, or exploring new revenue streams like advertising or referral fees. Similarly, you can also focus on reducing your unit cost by finding more cost-effective suppliers, streamlining your production process, or negotiating better deals with your vendors.

Real-World Examples of Successful Unit Economics

Examples of small businesses that have successfully optimised their unit economics include a subscription-based meal delivery service that ensures a consistent revenue stream and reduces waste from unused ingredients, a handmade jewellery business that offers a range of products at different price points and uses high-quality materials, and a mobile app startup that generates revenue from advertising and add-ons while keeping its unit cost low.

Conclusion

Unit economics is a critical tool for small business owners

looking to make informed decisions and optimise their profitability. By understanding your unit economics and focusing on strategies to increase your unit margin, unit revenue, and reduce your unit cost, you can set your business up for long-term success.

In today’s fast-paced and competitive business environment, it’s more important than ever to have a strong understanding of your unit economics. By tracking and analysing your unit economics, you can make informed decisions that can help drive your business forward.

So don’t hesitate to crunch the numbers and start optimising your unit economics today. With the right strategies and insights, you can take your small business to new heights of success.

Before you go!

My podcast is now live and you can listen to the same topic being discussed right here:

Apple — https://podcasts.apple.com/gb/podcast/the-business-podcast/id1679895040

Spotify — https://open.spotify.com/show/1RkCyfNJi0O3cgvpTcU1Hw

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