Unit Economics: What are they and what are they for?

Unit economics are a way of knowing how much money we earn or lose with each thing we sell. It is like looking at the price and cost of each product or service and see if it suits us or not.

Each type of business has its own ways of measuring unit economics, using numbers like price, cost, margin, cost to get a customer, value a customer gives us .

The unit economics are important to know if our business is going well or badly, because they show us if each sale leaves us profits or losses . They also help us decide how to grow our business, because they give us an idea of ​​what the future will look like and how to best use our money and time.

They also help us to compare different types of business or markets and see which ones we like best or give us more opportunities.

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MHA and unit economics

Let's remember that MHA is a digital marketing consultancy that offers strategy, design, development and optimization services for websites, social networks, SEO , SEM and email marketing .

MAH can work with companies as follows:

Helping companies define and measure their unit economics, that is, the key indicators that allow them to know the profitability of each unit of product or service they sell, such as price, cost, margin, customer acquisition cost (CAC), the customer lifetime value (LTV), among others.

Helping companies to optimize their unit economics, that is, to improve the relationship between the value provided by each unit and the cost involved in acquiring or producing. These results are given through digital marketing strategies that increase traffic, conversion, retention and customer loyalty.

Helping companies to project their unit economics. Estimate how your income, costs and profitability will be in the future based on different scenarios and variables.

This is achieved through analysis and modeling tools that allow different options to be simulated and evaluated and informed decisions made.

The case of Cuna Mágica

We can talk about the case of Cuna Mágica, a Mexican company dedicated to making furniture for infants.

To do this, MHA conducted an audit of the Cuna Mágica website and found several problems that affected conversion, such as the lack of information on the product pages, poor communication of the value proposition, and difficulties in payment methods.

MHA proposed to improve these aspects and also optimize payment campaigns on Google and Facebook , focusing on micro conversions, such as adding to the cart, requesting a quote or contacting via WhatsApp. The results were very positive, since it was possible to increase traffic, conversions and sales tripled in a period of 7 months.

MHA helped Cuna Mágica improve its key indicators that determine the profitability of each unit sold. As traffic and conversions increased, revenue per user and customer lifetime value (LTV) increased as well.

By optimizing paid campaigns, cost per user and customer acquisition cost (CAC) were reduced. In this way, the margin per user and the LTV/CAC ratio were improved, which are some of the measures of profitability and business growth.

How do Unit Economics apply to different types of businesses?

We can talk more generally, how unit economics can be applied to different sectors. Here are 3 examples:

A subscription-based business, like Netflix or Spotify, might measure its revenue per user as the monthly fee each customer pays, its cost per user as the cost of providing the service and content, and its margin per user as the difference between both.

Additionally, you can measure Customer Lifetime Value (LTV) as the expected revenue each customer will generate during their tenure with the service, and Customer Acquisition Cost (CAC) as the cost of marketing and sales to acquire a new customer. .

A transaction-based business, like Uber or Airbnb, might measure its revenue per user as the commission it charges for each trip or booking, its cost per user as the cost of maintaining the platform and customer support, and its margin per user. as the difference between the two.

You can also measure the LTV and CAC of each user, taking into account the frequency and value of the transactions they make.

And clearly, an advertising-based business, like Facebook or Google, can measure its revenue per user as the amount it receives for displaying ads to each user, its cost per user as the cost of providing the service and content, and its margin. per user as the difference between the two.

Likewise, you can measure the LTV and CAC of each user, considering the number and duration of the sessions they perform.

Challenges and opportunities posed by Unit Economics

As we already know, unit economics are a way of knowing if we earn or lose money with each thing we sell, but it is not so easy to know and use them well.

For this, we have to face some challenges and take advantage of some advantages that they offer us.

For example, we have to know what things to measure and how to measure them , that is, what things are important to our business, how much money they give us and how much they cost us, and what numbers help us know if we are doing well or badly.

This requires a deep understanding of our business model and the metrics that reflect it.

On the other hand, we can improve unit economics , that is, make each thing we sell give us more money and cost us less. This is achieved with digital marketing strategies that make more people know us, buy from us, recommend us and buy from us again.

This requires constant optimization and experimentation to find the best ways to attract and retain our customers.

We have to imagine unit economics , that is, think about how our income, costs and profits will be in the future depending on what we do or what happens. This can be achieved with analysis and modeling tools that allow us to test and evaluate different options and make intelligent decisions. This represents a challenge to anticipate and adapt to changes in the market and demand.

Written by Moises Hamui Abadi: I am an entrepreneur, founding partner of Viceversa and SoyMacho. After being in charge of several digital businesses and advising several other businesses; I decided to form MHA Consulting, a digital marketing consultancy dedicated to growing and empowering digital businesses in more than 7 countries and generating more than 1,500 million pesos.

If you want more information on this topic or you are looking for other options to profile your ideal client, at MHA you will find the solution you need. Schedule a call.