Unit economics describe the Revenue and costs that can be attributed to a single economic unit within a business model. They show whether a company generally makes or loses money with every additional sale, order or new customer relationship.
What counts as a „unit“ depends on the business model:
| Business model | Possible unit |
| SaaS companies | a paying customer relationship or a subscription |
| Online shop | an order or a product sold |
| Marketplace | a transaction |
| Delivery service | a delivery |
| Consultancy firm | a project or a billable hour |
| Production company | a product that has been manufactured and sold |
A basic calculation is as follows:
Contribution margin per unit = revenue per unit – variable costs per unit
One example:
A start-up sells a product for 100 euros. The combined cost of manufacturing, packaging, postage and payment processing is 65 euros.
| Key figure | Amount |
| Turnover per product | 100 € |
| Variable costs | 65 € |
| Contribution margin per product | 35 € |
Every product sold therefore generates a contribution margin of 35 euros. This amount can help to cover fixed costs such as staff costs, rent, software or administration.
In subscription-based business models, customer lifetime value and customer acquisition costs are often taken into account:
- Customer Lifetime Value (CLV or LTV): expected economic value of a customer relationship
- Customer Acquisition Costs (CAC): average cost of acquiring a new customer
- Churn rate: Proportion of customers who cancel their subscription or stop using the service
- High Margin: Proportion of turnover remaining after deduction of directly attributable costs
- Payback period: The period it takes to recoup the costs of customer acquisition
Put simply:
Customer Lifetime Value – Customer Acquisition Costs = economic contribution per customer
If the costs of acquiring and retaining a customer are higher in the long term than the revenue generated, the unit economics are negative. In this case, rapid growth may actually increase the losses.
Positive unit economics help start-ups to:
- to assess the viability of their business model
- Optimising prices and cost structures
- to identify profitable products or customer segments
- Planning marketing and sales expenditure more effectively
- to assess the conditions for scaling
- To present the financial performance to investors in a clear and transparent manner
However, positive unit economics do not automatically mean that the company as a whole is already profitable. Fixed costs relating to product development, administration, staff or infrastructure may still result in losses. They simply indicate, as a starting point, whether each additional unit can, in principle, make a positive contribution.
Typical ways of improving unit economics include:
- Adjust prices or pricing models
- reduce variable costs
- Reducing customer acquisition costs
- Increase customer loyalty
- Reducing redundancies
- generate additional revenue through up-selling or cross-selling
- prioritise particularly profitable customer groups
- Automating processes
A common mistake is to consider only turnover and production costs. Discounts, returns, support, payment fees, logistics and ongoing service costs should also be taken into account. Furthermore, all key figures must relate to the same period and the same unit of measurement.
innoWerft helps founders to identify the key metrics and figures relevant to their business model, to critically assess cost and revenue assumptions, and to present their unit economics in a clear and understandable way for pricing, growth and discussions with investors.