Unit economics are the P&L of a business reduced to a per unit basis.
A unit is the fundamental driver of your business model.
It varies across sectors and businesses. So for a subscription business it could be customers. For a for an airline it could be seats. For a law firm, it could be hours billed. It’s whatever drives your business model, at its core.
There are several numbers that go into a unit economics analysis:
Fortunately only two main factors to understand:
Unit Economics are particularly important for early stage companies, because most of them look really bad in traditional accounting and P&L statements. Most of them lose money.
Assuming the unit is a customer, unit economics tell us whether the profit we make from a customer is greater than the cost we pay to attract that customer.
A well balanced business model:
An out of balance business model:
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The history of unit economics
Unit economics was a variant of financial analysis that was invented by venture capitalists in the 90s to figure out which companies would one day make money. Because if they waited until these companies made money on a traditional P&L basis, they’d miss the chance to get in at a good price with little competition.