Unit economics

Unit economics refers to the relationship between revenue and cost that each additional customer brings to a business. I know that’s pretty dry, but try not to fall asleep here, as this is important and not too difficult.

A company has positive unit economics if it makes money for each additional customer or user it adds, a sign that it has a strong business model.

It is common for software companies to have strong unit economics as the cost of an additional user is often very small compared to the revenue they can bring in. Think of Instagram, where each new user probably costs Meta (Instagram’s parent company) a couple of cents in storage and bandwidth to host their photos or videos, while in return, Meta gets a valuable new target for their advertising customers.

Not all tech companies have positive unit economics. For much of its life, Uber’s ride-sharing service was an example of negative unit economics – each additional ride completed on its platform contributed to an overall loss to the company.

Much of this was down to a strategic choice by Uber to focus on user growth over almost every other metric, and they funded the financial losses by selling additional shares of their company to investors who believed in their long-term success.