🧠 Knowledge Series #12: Unit Economics Explained
The downfall of WeWork and why unit economics matter to your product’s strategy
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Hi product people 👋,
WeWork’s recent bankruptcy filing came as a surprise to few given the financial woes faced by the company over recent years. But what’s curious about WeWork is that its customers genuinely loved it. WeWork’s transformation of office spaces from dull, corporate shells into a place folks actually enjoy spending their time working and socialising doesn’t look set to be reversed any time soon.
WeWork is one of the rare examples of a company which reached product market fit across every single dimension except one: it never quite figured out how to make money. And, amongst other things unique to the company’s business model, this is a reflection of its poor unit economics.
In today’s Knowledge Series, we’ll explore what unit economics are, why they’re a critical aspect of product strategy and how you can directly and indirectly improve the unit economics of your own product.
What are unit economics?
Examples of unit economics metrics worth knowing
A closer look at the unit economics of WeWork, Klarna, Uber and more
How to improve your product’s own unit economics
What are unit economics?
Unless you come from an MBA background, the first time you’ll hear people talk about unit economics will likely be in the context of your product’s strategy and commercial performance.
Unit economics are a fundamental part of understanding product strategy and how your product is performing. Essentially, unit economics refers to the revenue and costs associated with acquiring and serving each of your product’s customers. It is a formula for breaking down the profitability of a single customer.
"Unit" in the context of unit economics refers to a single, standardized measure of a product or service that a business offers. This can vary depending on the business and industry. For example, for a software company, a unit might be a single subscription or license sold, while for a retail store, it could be an individual product sold.
In unit economics, each "unit" is analyzed to understand the direct revenues and costs associated with a single unit of a product or service. This analysis helps businesses to determine whether their basic business model is sustainable. It focuses on the profitability of selling a single unit, which is crucial for understanding whether the business can scale profitably.
In business, companies exist to add value to customers in ways which make money. And each of the constituent parts of a product’s business model can be thought of as the ingredients in the ‘recipe’ of the business. And just as you can decide to tweak and modify the individual ingredients in a recipe, in business, companies can choose to focus on one or more in their economic model.
Analyzing unit economics allows companies to evaluate the profitability of their business model per customer and make improvements to specific parts of the economic model to drive profitability. It is a critical framework for assessing subscription businesses like SaaS.
If it doesn’t quite make sense, we’ll explore some real world examples together in a while.
Here’s a simple example of the unit economics of a SaaS product: