The use of unit economics makes business more transparent. Understanding the specifics of ongoing processes makes it easier to manage the company and solve emerging problems. It becomes clear what costs the organization bears, how much money is spent on attracting customers and how the income received relates to expenses.
There is a phrase "Margin forgives everything". What does it mean? - The company spends money to attract consumers and incurs expenses because of this, but the profit received covers these costs. Thus, the enterprise is profitable.
Systemic shortcomings become visible when turnover increases. In this case, the company has many payments, but many of them are deferred. Cash gaps appear. Unit economics allows you to predict risks and see the business from a new angle.
Pros and Cons of Unit Economics
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Like any economic tool, the use of unit economics has not only advantages, but also disadvantages. Let's examine them in more detail.
When using the tool for the twitter database first time, you will have to spend a lot of time on calculations. You will need to obtain and analyze data for each client and all the advertising channels used. The greatest difficulties will be experienced by companies that carry out offline sales and work not with organizations, but with individuals. Most likely, the first calculations will show that the entrepreneur had only an approximate idea of marketing indicators. If you have not used unit economics before, it is possible that purchases of one person were recorded as sales to different clients, and advertising data was mixed.
With regular use of unit economics, calculations will become easier because they are automated. You will no longer need to collect as much information, since the analysis will take into account known data.
At the beginning, there is also a high probability of errors. Using the tool involves working with many formulas that are not easy to understand the first time. Therefore, specialists in this field often offer new enterprises to calculate the unit economy from scratch and audit it.
It is necessary to pay attention to the relevance of the data and its compliance with reality. Unfortunately, some companies use calculations incorrectly to achieve the desired indicators. Example: it is believed that the LTV to CAC ratio should be at least 3:1. In fact, this is just one of the ratios that cannot serve as an unconditional indicator of the profitability of the business plan. At a meeting of potential investors, a project was announced with an LTV to CAC ratio of 2.6, but in general calculations the figure was rounded to 3! Obviously, such calculations are not correct.