Are Your Products Making You Money? Unit Economics to the Rescue

Get ready to level up your business game, because today we're talking about the secret weapon of smart companies: unit economics. No, it's not about recycling cardboard boxes (though that's important too!). Unit economics is all about zooming into the nitty-gritty numbers behind every single thing you sell.

What the Heck Are Unit Economics, Anyway?

Put simply, it's breaking down the costs and revenues associated with one "unit" of your business. The definition of a "unit" depends on what you're doing:

• Product-Based Biz: One unit = one item sold (that fancy coffee mug, that software subscription, you name it).
• Service Biz: One unit = one client, one project, or even one hour of your time.

Key Ingredients of Unit Economics:

• Price: How much you charge for that glorious unit.
• Direct Costs (aka Variable Costs): The costs that change for each unit sold. Think materials, shipping, commissions directly related to that sale, etc.
• Contribution Margin: The magic number! It's your price minus the direct costs. This is the profit you earn from each unit before those pesky fixed costs come into play.

Why Businesses Should Give a Hoot About Unit Economics

Okay, maybe it sounds a bit dry, but trust me, this is where you can get an edge:

1. Hidden Profit Power (or Problems!): Unit economics lets you see which products/services are your cash cows and which ones might be secretly draining your profits. Time to give those money-makers some love and ditch or reprice the duds. In saying that, there are legitimate reasons to sell a loss making product or service using the loss leader strategy, where you sell at a loss to get customers through the door and sell higher-margin products. Think Costco's Rotisserie Chickens (currently AU$6.99!).
2. Pricing Sensei: Knowing your unit costs is essential to setting prices that actually make you money. No more plucking numbers from thin air and hoping for the best!
3. Scalable Success: Want to grow? Unit economics shows you if your business model can handle a surge in sales without your profits tanking. It's the difference between smart expansion and crashing and burning.
4. Laser-Focused Marketing: Unit economics tells you exactly how much you can afford to spend on acquiring a new customer and still be profitable. No more throwing money down the marketing drain!

Example Time

Let's say you run a cool online store selling Aussie-themed t-shirts. Here's what your unit economics for one shirt might look like:

• Price: $30
• Direct Costs:
  • Shirt + Printing: $10
  • Shipping: $5
• Contribution Margin: $15

This means for every shirt sold, you pocket a cool $15 before covering overhead like your website, marketing, etc.

Taking Your Unit Economics to the Next Level

• Customer Lifetime Value (CLV): This gets more advanced. It's how much revenue a single customer is likely to generate over the whole time they do business with you. Super important when you've got subscriptions or repeat customers.
• Customer Acquisition Cost (CAC): How much those marketing efforts REALLY cost to land a new sale. Unit economics helps you make sure your CAC is less than that juicy profit margin.
• Analyze, Analyze, Analyze: Compare unit economics across different products, time periods, or even customer segments. This is where those patterns and hidden opportunities start to reveal themselves.

Conclusion

Unit economics isn't going to solve every business problem, but it provides a crystal-clear foundation for making better decisions. Don't get scared away by the math – a basic spreadsheet is often all you need to get started.