One of the most difficult aspects of creating, growing, and finding funding for a startup is evaluating the business’ health and potential for long-term success. Unit economics offer a structure through which you can measure the potential of your startup. Before founders commit to a startup, they need a method to determine how much value they can receive at a per unit level. Unit economics are the key to uncovering a startup’s potential.
What are Unit Economics?
In unit economics, the unit represents the fundamental minimum piece of your business that helps you understand where the business’ revenue comes from. Measuring this unit will help you understand the exchange of value behind your business, or what drives your company forward. By using unit economics, founders can determine how much value can be generated for every dollar spent. Strong unit economics consistently create value and can lead to longevity for your business. Weak unit economics mean your business will lose value and may be doomed to fail.
What Should Startups Measure?
To determine unit economics for your startup, start by measuring the following. The terms are very general, but they will provide you with a good place to start. Keep in mind that every startup is different, and success is not necessarily determined by one particular model.
You should calculate the number of new customers over a set period of time. You should also consider the lifespan of your customers. What is the average amount of time they spend with your group? Another important factor is the annual revenue per customer.
Costs are another important factor to take into consideration. How much does your startup spend on marketing over a set time period? What are the sales cost over a specific period of time? How much does it cost to acquire a new customer?
Keep in mind that the best way to determine unit economics varies from startup to startup. Every business uses different methods of marketing and acquiring customers. The average lifespan of their customers also varies. Successful growth looks different for every group. Unfortunately, there is no secret recipe for success. However, unit economics will help you and any potential investors determine how much your growth will cost and whether or not it is worth the price.