Unit Economics: what are they and how to measure them?

Unit economics refers to a way of measuring a company’s revenues and costs based on a per-unit model. Generally, this system seeks to measure how each unit affects revenue and other business metrics.

One of the key factors why SaaS business models are so interesting for Venture Capital is that they are models in which future projections can be predicted. These projections can be made in a close way thanks to the unit economics of a SaaS.

In that sense, understanding and managing SaaS Unit Economics cannot be overlooked. At Next Scenario we know how important these metrics are for your business and in this article you will get the most complete information about SaaS Unit Economics so you can keep control of your business. But first of all let’s start with…

What are Unit Economics?

Unit economics refers to a way of measuring a company’s revenues and costs. Generally, this system seeks to measure how each unit affects revenue and other business metrics.

In particular, SaaS companies use Unit Economics with the intention of knowing how each new customer will affect the company’s financial performance.

Unit Economics
Unit Economics

How to calculate unit economics in saas models

The effective use of SaaS Unit Economics can help you identify business model problems, opportunities or evaluate the viability of your business model. The unit economics of a SaaS are the following:

  • Lifetime value (LTV): is a metric that measures the value created by each customer over time. It is very important to know the profit margins left by each customer. We have already analyzed it in this article on LTV.
  • Customer acquisition costs (CAC): is an indicator that measures how much the company is spending in the process of acquiring each customer. It is another key metric to know our profit margins and the effectiveness of the acquisition processes that the company is executing.
  • Churn rate: it shows how many customers have abandoned the use of the product or simply have not renewed their subscription in a certain period of time.
  • Retention rate: is the opposite metric to churn rate. The retention rate measures how many customers have been retained by the company in a specific period of time.

How to calculate an unit economics?

The metrics described above have their particular way of being calculated, some use formulas that are the result of other metrics, while others are input data that do not need any previous calculation, in the previous points you have the article where we deepen how to calculate them-

In any case, each metric has its own dynamics in terms of calculation and interpretation. Moreover, it is important to know how to relate the different indicators in order to obtain an efficient and realistic analysis of your company’s behavior.

In Next Scenario you can find more complete information on each metric, what it is used for, how to calculate it and so on.

saas unit economics template

Try our unit economics templates:

financial model template
financial model template

Frequent errors in the Unit Economics

There are two common mistakes in the analysis and interpretation of Unit Economics, here are two common mistakes.

Do not separate data clearly

Analysis of SaaS Unit Economics is easier and more realistic when data is properly separated. Ideally, you should segment customers in a convenient way to see and correct problems faster.

Being inconsistent in metrics

All SaaS metrics need consistency and coherence in the definition of the concepts to be used. That is, you must maintain a consistent relationship on what is a customer, what is considered a sale, what are the time windows to analyze, and so on.

Of course, consistency in metrics, in their definitions and in what is a unit for your business is what will allow you to analyze in detail the performance of your business.

Why SaaS Unit Economics is important

Thanks to SaaS Unit Economics you will be able to forecast and project your future revenue with reliable data, this is ideal for attracting investment or simply getting a personal idea of what your company can achieve.

Not only that, the metrics associated with Unit Economics are useful when you are thinking about optimization because you can pinpoint the product that needs it most or the sector it would be most useful to. Undoubtedly, they are relevant tools for the evaluation, creation and execution of growth-oriented strategies.

On the other hand, it is ideal for understanding your position in the market. Thanks to Unit Economics you can know how the competition is performing in each area of work to compare it with your performance and determine what needs to be improved to keep up with your market niche.

In short, measuring Unit Economics properly is key to have control of your business and in Next Scenario we give you what you need to be able to calculate them properly.

You can use our free data analysis tool for Saas to calculate Retention Rate and other metrics for free.

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