Understanding Unit Economics: The Building Blocks of Business Success

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“Another such victory and we are undone”

said Pyrrhus after a costly victory that nearly destroyed his entire army and prevented him from continuing to fight.

I’m sharing an example of such a victory, which became a benchmark for me — one that changed my perspective and how I analyze companies I work with and explain why Unit Economics is critical for businesses of all sizes.

A bit of background for context: I founded my consulting firm at the end of 2015, not long after the birth of Adam, my second son. Since then, I’ve been guiding companies of various sizes.

The company in question (the company details have been changed) was involved in e-commerce, specializing in home design products. I met Moshe, the founder, following a referral from a former employee of mine who served as the company’s marketing manager and felt they needed help.

Moshe had previously held a senior role at a competing company and believed that “he could get more”—costs could be reduced, marketing could be done better, and overall, greater success could be achieved. Moshe managed to raise a respectable sum of $300,000 from angel investors and set out on the journey.

In my first meeting with Moshe, when the website was still just a dream and no code had been written, I advised him to use an existing platform (Shopify wasn’t mature enough back then, but there were plenty of alternatives). Moshe decided to “go big” and hired a company to build the website from scratch.

Months later, they reached out to me again. This time, I also met with a representative of the investors who requested closer guidance. It turned out that the software company had already invoiced nearly $70,000 in costs and the site still lacked some very basic features.

Naturally, we immediately halted the site project and switched to an existing platform at a relatively negligible cost. We relaunched, and the team resumed marketing campaigns across various channels.

My next conversation with Moshe was about Unit Economics—how much does it cost to produce each product, and for how much are they selling it? Moshe assured me that this analysis had been performed by an accountant and showed me the numbers. The unit cost for all products was identical. When I asked why, Moshe insisted that production costs were nearly the same and that there was no point in drilling down to the level of a few cents.

Fast forward a few months: we had learned which products customers preferred and scaled up our campaigns. Sales during Black Friday reached several hundred thousand dollars, the ROI on campaigns was positive, and we ended the month feeling victorious.

On December 1st, the investor representative—who had been very involved throughout—called me and said they were shutting down the company. I was shocked, even more so when he said that losses from sales were double the revenue generated. In other words, instead of profiting from product sales, they were losing about $40 per unit sold.

A post-mortem analysis revealed that, of course, not all products cost the same to produce. The leading product cost more than three times the others and was mispriced relative to its cost. The investors decided to end their investment after the funds were depleted — split between website development costs and incorrect pricing.

The lead investor kept in touch with me (actually, to this day) and has since invested in another company I’m supporting, which is now in a much better place, to everyone’s delight.

So, where did we all go wrong?

First, Unit Economics is complex to calculate. 

At its core, you calculate the average Customer Acquisition Cost (CAC), subtract it from the average Customer Lifetime Value (CLV), and check if there’s enough margin (CLV – CAC).

In SaaS, we talk about Annual Recurring Revenue (ARR) versus churn relative to CAC. In e-commerce, it’s crucial to factor in product cost, return rates, shipping costs, and fraud rates. In gaming or freemium models, we calculate ARPU and ARPPU, and so on.

In every industry these calculations are “approximate.” Everyone calculates CAC differently; some consider CLV indefinitely, others over a year. So maintaining consistency while keeping accuracy is a challenge. For companies producing physical products, like in this example, the complexity increases significantly.

The problem continues with the word “average.” 

Pini Yakuel, the founder and owner of Optimove, wrote a 2013 article titled “Beware of the Giraffes in Your Data.” To paraphrase that article (a must-read for any marketer), the average hides your data. The “giraffes”—the large, prominent parts of the data—hide problems.

When the accountant calculated the average at Moshe’s request, he “smoothed over” products with very low costs and ignored the extreme high cost of the leading product.

Another issue lies in outliers: customers (usually in SaaS but also service companies) who pay the same but require much more attention from support, professional services, and post-sale teams. Unit Economics must account for these inputs to identify which customers cause you to lose money (notice I said “which” customers, not “if”—this isn’t a mistake. At scale, profitable customers “subsidize” unprofitable ones).

A more complex analysis involves concepts like the whale chart.

What have I personally changed since then?

Real, detailed checks—not based on averages. The lower the industry margin, the more granular the check (down to individual cents). 

Periodic reviews of Unit Economics —especially if the company changes its pricing model. We analyze it before launching to avoid mistakes or outliers that could “sink” us.

Scenario analysis using Excel can help uncover weak points.

So how do you start?

Apply the Pareto Principle (80/20 rule): 20% of customers bring in 80% of the revenue. Put that top 20% in a pretty box, and protect and nurture them. Analyze the remaining 80% carefully. High-return-rate customers in e-commerce or high-maintenance customers in SaaS will stand out.

Next steps:

Cap and price extreme cases. Limit customer service hours for certain clients or restrict the number of annual returns.

“Fire” customers. Companies usually resist this idea, but you’ll be surprised how much time and energy it frees up.

Sometimes identifying problematic customers is challenging, especially in service-based or highly customized businesses. If you’re still struggling to spot them and your margins are slim, the issue likely lies in your pricing.

In Summary

Unit Economics is far more than just subtracting expenses from revenue. It requires deep analysis, continuous review, and bold decision-making.

As I learned from my experience with Moshe and many other companies I’ve supported, knowing the numbers isn’t enough—you need to understand the story behind them.

Whether you’re a young startup or an established business, identifying and addressing Unit Economics issues as early as possible is often the difference between a thriving business and “another Pyrrhic victory.”

Most importantly—don’t be afraid to make tough decisions. Sometimes, success comes from cutting back or letting go of unprofitable customers.

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