The term "unit economy" has become a rumor in Runet, and every article on this topic is accompanied by heated debates. What exactly does this term mean, why do we need it and whether we need it at all? What is ARPPU, COGS, APC?
We will tell you about all of this in an article in clear language.
What is a unit economy in simple words
The unit-economy is a calculation method which allows us to figure out if a unit is profitable or unprofitable. The unit can be a product, a service, a customer - it depends on your business model. The key is that this unit must generate income for the company.
The conclusions are simple: if the business earns money on a particular unit, then the business model is working. You either need to keep moving in the chosen direction, or improve the promotion strategy (or the product itself) to make even more money, or scale up (e.g. open another store). If the business is losing on a unit, then you need to understand why and take action. If you try to scale on a loss-making unit, you will increase not profits, but losses.
History of the unit economy
Opinions vary as to who invented the unit economy. According to one version, the method was invented by David Skok, an American investor who invested in startups. The investors demanded a clear business plan and calculations from the startups. But since the inventions included completely new products and services, there was little to rely on. Then startups started "drawing" numbers, and this did not allow for an adequate assessment of risks. Investors needed answers to the questions in order to make a decision:
how much money is spent on creating and selling one unit of a product;
how much profit the sale of one unit makes;
how much does it cost to attract a customer.
Unit Economics helps to understand these things.
According to another version, the term appeared in the period from 1995 to 2010 when the U.S. was experiencing a boom in entrepreneurial activity, including in the IT sector. Programmers, designers and other professionals were burning with ideas, but had no understanding of the numbers. And consequently, they could not determine how profitable or unprofitable their idea or selected business model was. In the noughties in the textbook for entrepreneurs "Entrepreneurship: Starting and Operating a Small Business" there was a separate chapter "Business Decisions & the Economics of One Unit". It is true that at that time it was not yet considered a separate method of calculation - all calculations were performed according to standard formulas, but it was possible to attract attention to the fact that in addition to total income and profit there is a profit for individual units. Only later, new terms and ways of calculations began to appear, and the model was called unit economy.
What we have here is a relatively new term, so there are discrepancies in the interpretations, formulas and generally the expediency of using this method.
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