Unit economics is an economic modeling technique used to determine the profitability of a business model by evaluating the profitability of a product unit or an individual customer. A business can only be successful if one unit of the goods or services makes a profit.
The glossary of unit economics
The user is a basic entity that determines what we work with, in the general case, this is a person who got acquainted with our product through advertising. For example, a visitor to an Internet project site or a company that was called during cold sales, in fact, we are talking about a card in CRM.
User acquisition (UA)
The number of attracted users. It shows how many users we introduced to our product through marketing. For example, the number of visitors who came to the site using contextual advertising or the number of companies we called during cold calls.
User-to-customer conversion rate.
A client or the number of clients that we receive from the user flow, taking into account the available conversion rate. B = UA x C
Average Price (AvP)
The average check is the amount of money that our customer paid for our goods or services.
Cost of Good Sold (COGS)
The cost of sale is an important measure of the costs we incur on each sale. It is important to separate the fixed costs that we incur whether we have sales or not from the mandatory costs that we incur on every sale. For example if we are selling a product then COGS will include the cost of purchasing the product. For b2b sales COGS may include a bonus that we pay our sales manager on every sale.
First sale COGS (1sCOGS)
Additional costs that we incur on the first sale. It is important to understand that these are additional costs to COGS. Examples of such expenses could be the cost of running pilot projects and integrations for corporate clients or paying an increased commission to our sales agent.
Average Payment Count (APC)
The average number of payments made by one customer for the selected period. By default, it is considered for the entire lifetime. It is important to be careful when calculating this value and it should never be rounded off.
Average Revenue per Customer (ARPC)
It shows how much we earn from sales made by the client during the selected period, excluding marketing costs. Calculated using the formula ARPC = (AvP - COGS) x APC - 1sCOGS. It is an important value for evaluating business performance, comparing it with CAC, you can get an estimate of the return on investment in marketing.
Average Revenue per User (ARPU)
It characterizes the income we receive from each user, excluding marketing costs. It is calculated using the formula ARPU = ARPC x C. It is an important value for evaluating business performance, comparing it with CPA, you can get an estimate of the return on marketing investment.
Customer Acquisition Cost (CAC)
All costs that you incur to get a client are taken into account. For example, to calculate it we divide your entire marketing budget by all the clients received.
Cost per Acquisition (CPA)
The cost of attracting one user. It is calculated by dividing the total marketing budget by all users. Unlike CAC, CPA is a decision metric because it is independent of other metrics such as conversion or user flow.
Acquisition Cost (AC)
The marketing budget, all costs for attracting a stream of users.
Contribution Margin (CM)
The marginal profit from our user flow. It shows how well we sell our product or service. The main value that determines the effectiveness of our solutions. Calculated using the formula CM = UA x (ARPU - CPA) = UA x (ARPC x C - CPA)
The turnover from the sale of goods or services. It is calculated using the formula Revenue = B x AvP x APC
Return on Marketing Investment (ROMI)
The return on marketing investment shows how effectively we have worked out our marketing budget. It is calculated using the formula ROMI = CM / AC
Gross Profit Margin (GPM)
The value characterizing the part of sales costs (COGS) in the total turnover. It is calculated using the formula GPM = CM / Revenue.
1. Unit is goods
2. Unit is a client