Every business starts with a mission and vision statement and a solution to a common problem. That solution can be a product or service people are willing to pay for. It’s easy to lay out a business plan with wishful thinking, but if it isn’t grounded in reality, it is a plan in theory. As an entrepreneur, you have to visualize the path to profits and help investors and other stakeholders see it. Unit economics are like signboards on your path to profitability. They help you set milestones, track how close you are to your target, and spot deviations.

What Are Unit Economics?

Unit economics tell you a lot about your business if you understand what the numbers are saying. It breaks down your revenue, costs, and profits to a single unit. A unit represents a customer, an individual or business customer. How you define the unit depends on your business. A unit may mean a subscription for a software company, a product for a manufacturing unit, order value for a business-to-business (B2B) company, a transaction for a retailer, order volume for e-commerce, table turnover for a fine-dining restaurant.

When you know how much each unit adds to revenue and costs, you can calculate breakeven, set realistic targets, build flexible budgets, and adjust your financial and business decisions accordingly.

The Role of Unit Economics in Business Planning and Strategy

Line managers and department heads use unit economics in day-to-day operations to meet their monthly and quarterly targets. But entrepreneurs can also use it for business projections and goal setting. Let’s understand how.

A taxi service company’s goal is to add 10 new vehicles and expand its area coverage. This is an investor pitch and may even grab investors’ attention. However, investors need to see real numbers: a financial model showing how much funding you need, how you will use it, and when the investment can start yielding returns.

When you back your pitch with unit numbers, it shows you have a clear roadmap for executing the strategy and helps investors assess risk. It brings transparency to the business plan.

Imagine you are running three vehicles and burning cash, without realizing how much you are losing every kilometre. You scale to 10 vehicles and longer distances, keeping the same price. Scaling without understanding the profit/loss on every kilometre will increase revenue but accelerate losses.

When you know the revenue and cost each kilometre will bring, you can allocate budget smartly and secure the right financing to ensure finance costs don’t offset your returns. Presenting these numbers to investors will help you win their confidence and set realistic milestones.

Let’s look at some business scenarios where unit economics can inform business planning and strategy.

How to Use Unit Economics in Business Planning

Business planning means creating a step-by-step plan and allocating budgets and targets to each department to execute the business strategy. Most startups fail here because they use a broad and undefined addressable market and make unrealistic financial projections.

Right Market Sizing

Every business operates in a market, and putting a superficial number to your total addressable market (TAM), such as “ in a $50 billion TAM, X Co. aims to capture 1% of the market”, doesn’t build credibility. A breakdown of how you arrived at the TAM needs a bottom-up approach.

Let’s say the taxi service operates in a particular city, where average daily rides are 12 (roughly 8 km distance) and average revenue per ride is $25. If you earn $300 a day in one taxi, adding 10 cars could bring your addressable revenue to $3,000 a day, or $90,000 a year. You can even set a target of achieving $120,000 revenue in the third year by targeting long-distance rides of, say, 50-80 kms. Presenting TAM this way communicates your confidence and research to stakeholders.

Financial Model

When you tie unit economics to financial targets, you’re building on what you pitched to your investors. Each stakeholder uses the same metrics, from the driver to the fleet manager to the finance head to the entrepreneur. This keeps everyone aligned on the goal. Business owners can build a financial model around that revenue target. They can set budgets where it matters, cut costs on things that don’t add value, and plan ways to maximize revenue without increasing costs.

Your financial advisor can help set a marketing budget with a target of reaching 1,000 potential customers and converting 3% into regular paying customers. That will help you control customer acquisition cost without overspending on unproductive marketing. You can apply similar budgeting to a loyalty program, opening/closing a branch, or adopting new technology. Unit economics bridges the macro numbers and ground numbers. If some programs don’t deliver the desired outcomes, you can cut your losses by dropping them.

These are just a few examples of how business planning can use unit economics. There are many other ways to use them. A business consultant can help you scale the unit economics across the hierarchy and make data-driven business decisions.

How to Use Unit Economics in Business Strategy

Business strategy is a long-term vision of how you plan to differentiate your business. Some target cost leadership and some target market share leadership. Some target premium products, some target high-net-worth clients, while others focus on value growth.

Unit economics help businesses design a strategy that works in the real world, not just on paper.

• Pricing Strategies: If a business is losing money, average order volume and order value will help determine whether pricing or product-market fit is the problem. Cost and revenue per unit will help you determine how much you lose per product and the volume and price you need to break even. You can cut costs and reduce the quantity of the product if increasing price will affect sales.
• Funding Strategies: Customer acquisition cost/cost per transaction can help you forecast cash flow requirements and arrange funding accordingly.
• Expansion Strategies: Another way to use cost per unit is to determine financial needs and available financing costs, and then decide whether you can handle a large order or bid for a tender at a realistic price. Most businesses run in the red because they quote too low to win a bid and then fail to fulfill the order.
• Effective Resource Optimization: Breaking down revenue per user by branch, or customer acquisition cost by channel (influencer ad campaign, festival, loyalty rewards, sponsorship), can help businesses tweak their strategy, focus resources on what works, and scale their strengths.

Businesses often fail to recalculate unit economics after strategy changes. For example, if you reduced the packet size from 200 grams to 175 grams, You must incorporate that into your calculation to determine how effective the strategy was. A business consultant can help you set up a unit economics dashboard, provide strategic and planning insights, and monitor how business decisions affect revenue and cost.

Contact Glenn Graydon Wright LLP in Oakville to Help You with Business Planning and Strategy

Talk to a professional business consultant to help you get strategic clarity, fine-tune pricing, control cash burn, and build a model that attracts the right kind of capital. To learn more about how Glenn Graydon Wright LLP in Oakville can provide you with the best accounting and business consulting services, contact us today at 905-845-6633 or connect with us online to schedule your initial consultation.