Templates

Unit Economics Template - Excel

Free tool that helps to analyze fundamental unit economics by calculating margins, breakeven, and LTV (lifetime value, or customer lifetime value) based on inputs of recurring and transaction (one-time) revenues and cost of sales, churn rates, customer lifetime, and more. Prebuilt into the Standard Financial Model. Used by pre-seed and Seed stage companies.

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Unit Economics Template Key Features
  • The Unit Economics tool is built to help entrepreneurs and investors forecast the cash flows and LTV on a single user (customer, subscriber, client, etc.) basis.
  • Built to help entrepreneurs understand the mechanics behind unit economics.
  • Creates a forecast of LTV based on inputs of recurring and transaction (one-time) revenues and cost of sales, churn rates, customer lifetime, and more.
About the Unit Economics Template

What is Unit Economics?

Unit Economics is a term used in business to describe the relationship between a company's revenue and the costs associated with producing its product or service. In other words, it is a way of measuring whether a company is making money or losing money on each unit of product or service it sells.

Why Is Unit Economics Important?

Unit economics can be a helpful tool for evaluating a company's financial health and determining whether or not its business model is sustainable.

How to Calculate Unit Economics?

Two main ways to measure unit economics are gross margin and contribution margin.

  • Gross margin measures a company's revenue after deducting the cost of goods sold (COGS).
  • Contribution margin measures a company's revenue after deducting all variable expenses (including COGS).

Variable costs are those that change in proportion to the number of units produced or sold, such as raw materials and labor.

The gross margin and contribution margin are important metrics to track because they can give you insights into how efficient your company is and whether or not your business model is sustainable in the long run.

How to Calculate Gross Margin?

To calculate gross margin, you need to take your company's total revenue and subtract the cost of goods sold. This will give you the gross profit. From there, you can divide the gross profit by the total revenue to get the gross margin percentage.

Gross Margin = (Total Revenue – Cost of Goods Sold)/Total Revenue
Gross Margin Percentage = (Total Revenue – Cost of Goods Sold)/Total Revenue x 100

How to Calculate Contribution Margin?

To calculate the contribution margin, you need to take your company's total revenue and subtract all variable costs (including COGS). This will give you the contribution profit. From there, you can divide the contribution profit by the total revenue to get the contribution margin percentage.

Contribution Margin = Total Revenue – Variable Costs
Contribution Margin Percentage = (Total Revenue – Variable Costs) x 100

What Are the Implications of Unit Economics?

There are a few implications that come with good unit economics. The first is that your company is efficient and can generate a profit on each unit of product or service it sells. This is important because it shows that your business model is sustainable in the long run. Additionally, good unit economics can help attract investors and lenders, as they will be more likely to invest in a profitable company.

On the other hand, bad unit economics can be a warning sign that your company is inefficient and is losing money on each unit of product or service it sells. This can be a problem because your business model could be more sustainable in the long run, and you may have difficulty attracting investors and lenders.

What Are Some Challenges With Unit Economics?

One challenge with unit economics is that it is just one metric and should not be used in isolation. Additionally, calculating unit economics can be difficult because many variables are involved. For example, you need to know the cost of goods sold (COGS) and all variable costs to calculate the gross margin and contribution margin.

Another challenge with unit economics is that it can be easy to manipulate the numbers to make your company look more profitable than it actually is. For example, you might be tempted to only include certain costs when calculating the gross margin or contribution margin. It is essential to be transparent and honest when calculating unit economics so that investors and lenders can make informed decisions.

What Are Unit Economics Best Practices?

Some best practices for unit economics include being transparent and honest when calculating the metrics, keeping in mind that unit economics is just one metric, and using other financial metrics in conjunction with unit economics. Additionally, it is important to consult with a financial advisor if you have any questions about how to calculate unit economics or what the implications of good or bad unit economics might be.

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