Unit Economics Model Design
CORE CONSIDERATIONS IN
Consumer Products - Sum Of Parts
Unit economics in the case of consumer products in fairly easy to understand. What one needs to do is to add up financial costs of all the components of the product to arrive at just the cost figure of the product. For instance, if one is selling a pack of cookies, one needs to add up the costs of all the ingredients that go in each pack of cookie along with packaging costs that are directly variable with the cookie pack. Similarly, if one is selling an electronic product such as a cellphone, one needs to add up the unit cost of all the items that go into making that cellphone, including wiring, screens, printed circuit board, speakers, light, camera lenses etc (the list is extremely big to be able to list each component here).
if one is sourcing various components from different vendors, then one can easily include the buying cost of the components. if one is producing something from scratch using basic elemental materials, one needs to look at the costs at those elemental levels.
Consumer Products - Time & Scale Consideration
This is important.
When we add up costs of all the components of any product, we have to look at these costs along two dimensions. Time Dimension & Scale.
The time dimension of the cost components is important because the costs of components does not remain constant over time. One needs to see how the costs of unit components will change over time.
The scale dimension is important because as the scale of business increases and one is able to procure larger quantities of individual components, one can get better pricing for larger quantities. Thus the overall components cost of a final good may decrease as scale is achieved.
These two dimensions help in modelling the gross margin levels of the venture in more accurate fashion. The importance of accurately assessing gross margins cannot be emphasised enough.
Thus from financial modelling perspective, if an entrepreneur is able to understand and model unit economics well, they increase the probabilities of achieving the projected results in future. Investors who understand the unit economics well, are able to understand the business model of any venture in relatively greater depth compared to when they do not pay attention to he unit economics of a business.
Understanding unit economics in services business model becomes more critical as the lines of costs are not that clear in services business. We discuss the same below.
Rest coming soon ... to be continued.
Importance
Understanding unit economics model is the most important thing one can do in an any entrepreneurial venture. Although it is a very simple thing to measure at any point in time to assess how margins are made on each unit of product and service sold, it seems to have taken a backseat in new age entrepreneurs minds.
We believe that in service models and especially in services related aggregation model, unit economics are required to be deeply understood.
There are a few core considerations that help in building a strong unit economics model.