How To Calculate The Unit Economics Of Your Business

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Understanding and correctly calculating the unit economics of your business is extremely important. It is a large part of a successful business plan, and the business itself. The term might sound complicated, but it is surprisingly simple.

In an effort to help you understand how to calculate the unit economics of your business, we will go over the unit economics of a real business. Our example business: A single-location exercise gym. We will call it Bob’s Fitness.

Business Unit Economics: Costs To Open The Business

This kind of a business is going to have some heavy costs before you start. Here are some:

a) Leasing the facility
b) Remodeling the space
c) Buying exercise equipment
d) Buying liability and other types of insurance
e) Hiring and training staff
f) Getting various city and state permits and licenses to open the business
g) Legal costs that come with opening such a business
h) Optionally creating a website
i) Software for gym membership management and on-site computers and card scanners

This list goes on, and depending on your state and geographic location can cost far over $100,000 and take 3-9 months to complete.

Business Unit Economics: Ongoing Month-to-Month Costs

If the fixed costs to start the business were not high enough, the ongoing costs can be just as high. Here are some examples:

a) Ongoing staff salary
b) Equipment replacement
c) Building maintenance
d) Possibly being sued and the costs for legal fees
e) Electric and utility bills
f) Ongoing insurance payments
g) Ongoing facility rent payments
h) Marketing costs
i) Add a little extra because every month some extra cost is bound to come out of the blue
j) Here is the sad news for many people: after all those costs, you will have to pay taxes from your revenues and salary

This list also goes on and on. The point of it is not to get depressed or discouraged, but to understand the difficulties and plan for them. If you plan for these challenges, you will be better prepared to meet these challenges. Now we will get to some of the more encouraging parts of the business. If you are faced with high costs that should make you think about pricing the product in a way to make up for these high costs, or being able to sell enough products to make up for the costs of delivering them. Additionally, if your products has high costs per each individual product like ingredient, material or unit production cost, that is something to think about as well. You may be forced into selling your products for a price that is too high and will turn off many potential buyers.

Unit Economics of Revenue Transactions

This is the moment we have been waiting for. Let’s count how many customers we need to get in order to break even, and then turn a profit. It is precisely here that you get to understand whether all the risks and costs we outlined above will be worth the reward. Sometimes this section is also useful to help determine whether this business can or can’t ever be profitable. Let’s get right into the calculations.

Let’s say, as an example, that you charge each gym member $50/month. You also charge them a one-time $50 activation fee. On average, let’s say that an average member remains a paying member for 12 months.

Let’s say that your costs to open were $100,000 which you need to eventually recoup, and your ongoing costs are $50,000. Actual costs would be much higher in most cities.

To break even on a month-to-month basis, you will need 1000 members paying $50/month. If you keep signing up new members, you will need fewer registered members, but the number of $50 transactions has to be 1000 to get to the break-even point of $50,000 per month.

Note: You will be taxed on your revenue which means that in practice you will probably need about 25% more customers just to make up for the taxes.

Now think about how long it will take to get to a point where you are having that many regular and new customers. Think about what will happen during the first month. Maybe you will have 200 customers. The next month you might have 300 customers. Different businesses grow at very different rates. In the summer, people might want to exercise outside so you might actually have a decrease in customers. The important thing here is to understand that for the first year or so, this business will very possibly lose more and more money as you improve your marketing initiatives and start to grow your customer base.

If the entrepreneur keeps working and, the business will mature and get to the 1000 customers per month and grow beyond that figure.

Unfortunately, there will be physical space constraints. A single gym cannot be home to thousands upon thousands of members who attend the gym simply because the physical space has limitations. If it gets too crowded, and the gym will feel less like the small community place that it once was, that will turn off some members and they might stop going to this gym.

After a pretty long time, a gym can become profitable. But you would have to put hundreds of thousands of dollars into it before it becomes profitable. And it can never become infinitely profitable because it has a space capacity so membership growth will eventually level off. To make more money, you would have to open another gym and go through the pains you went through with the first gym.

Conclusion and Summing Up

As you can see, it is very important to go through the unit economics of your business in order to help you see the full financial picture of your business. In our example we went through how much money it would cost to open and run this kind of a business. We also went over an estimate of how long it would take to break even, and what the maximum opportunity might be.

What if you wanted to open a gym, but did not go through the financial forecasting thoroughly, and the high costs came as a big surprise to you? You might be kicking yourself two years later, and asking yourself why you did not thoroughly go through the early cost, revenue and profit estimates.

Video About Measuring Your Business Unit Economics

Further Resources

If you are interested in unit economics and starting a business, you may be interested in my business book on starting a business. Additionally, I created a number of mobile business apps that you may also find useful for starting a business. And if you would like to get one on one coaching from me, here how you can do that.

Author: Alex Genadinik

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