If you’re running a startup, chances are that you’ve heard that you need strong unit economics. But how much does this buzzy keyword actually matter for your business? 

There’s been so much hype around this concept among financial professionals, and many growing startups have built their entire spending strategy around unit economics. 

Two things can be true simultaneously:

• A startup can have great payback periods, margins, and retention.
• That same startup can also be in a dire financial situation.

I believe an over-focus on unit economics has distracted the industry from the glaringly obvious: having an overall healthy cost base and operating model.

What Does Unit Economics Mean?

Unit economics involves looking at your economic metrics in the context of each unit sold. In general, this involves looking at: 

• Customer Acquisition Costs
• Margins
• Payback Periods
• Lifetime Value 

Often, this involves running a customer cohort analysis to understand key retention metrics.

The unit economics approach has become particularly popular among sub-scale startups because it provides an idea of potential operating leverage when used correctly. However, positive results at a small scale may lead to overconfidence, which can lead to scaling too quickly and a more bloated organization.

The Issue With Relying on Unit Economics Alone

Here’s the crux of it: Many organizations focus on unit economics at the expense of their overall economics. An organization could boast solid unit economics but crumble if you dig deeper into the metrics that are more telling. 

For example, it’s plausible for a startup to have 100 employees, a payroll of $10 million per year, and good unit economics but only draw in $1 million annually in revenue. Despite good unit economics, there are still about 90 employees too many in this scenario, making operations impossible to sustain. 

When used in this way, unit economics shield your organization from the reality of your financial health. It can be tempting to hide behind a false sense of security, making it far too easy not to be as proactive about growth and strategy as you should be.

Not to mention, your organization is at risk of being unable to deliver on investor expectations.

Good Unit Economics Don’t Necessarily Mean a Healthy Business

Good unit economics should be just one component of a broader financial strategy. Unit economics won’t tell you anything about your total revenue or cash burn rate when used on its own. 

Many startups use strong unit economics as an excuse to overspend on payroll early on, thinking that sales growth will make up the difference later on. If you burn through cash too quickly, you’ll struggle to secure future funding rounds and stay afloat. Obviously and unfortunately, you will fail to reach these sales goals. 

In particular, startups often rely too heavily on LTV:CAC ratios when considering unit economics. While customer acquisition costs are important to consider as you build your brand, it’s difficult to determine exactly what lifetime value is going to look like when your organization is still so new and your product is likely to continue evolving. 

Once your startup is generating a modest amount of revenue and has found a product market fit, you’ll need to make a conscious decision about whether to be profitable or not. If you’re not profitable, it should be because your organization is investing in something specific to benefit you in the future, rather than something that just happens. 

Look at Your Unit Economics Holistically

All of this is not to say that unit economics are useless. This is merely a cautionary tale to holistically understand traditional growth metrics and trends—such as revenue, gross profit, and net income—along with your unit economics. A holistic view paints a broader picture of your finances and provides the information your startup needs to make thoughtful decisions moving forward.

Taking a birdseye view approach to your startup’s economic strategy gives you the agility needed to create sustainable growth and weather any financial climate. 

This strategy requires time and expertise. If you don’t have financial experts working for you in-house yet, your organization may need to bring on consultants like Graphite to provide that support. This level of detailed understanding is invaluable, though, especially when it comes time to pitch to investors. 

While many investors do look at unit economics, this is only one piece of the overall puzzle. Taking a detailed, holistic approach not only shows investors that you care deeply about your business but also that you have a clear comprehension of how it works and how to make strong financial decisions. 

Build Your Financial Strategy With Graphite

In order for your startup to succeed, you need to go beyond financial buzzwords and build a more sophisticated financial strategy that takes into account all of the specificities of your industry and your organization. 

At Graphite, we help your startup navigate the ins and outs of building a financial model and raising capital. Our team of fractional CFOs and accountants will support your startup and help you develop the financial strategy you need to succeed in the long term. 

Test out our financial model template or reach out for expert guidance on orienting your financial strategies toward long-term success.