Blog Detail

• 10-12-2022
• 09:08:47 AM

Every startup must be successful. Meanwhile, several startups fail in their first year. The difference between the cost of production and the cost of marketing your good or service should, in theory, be maximized. Because of competition and the financial stability of your target market, you cannot, in reality, cut the cost of production to zero or continuously raise your marketing expenses. Building a successful startup is more difficult than it sounds. It is easy to turn on your internet data, go on Twitter, and rant about how people should build a Startup or business while you don’t even have any first-hand experience in creating a business, much less a successful one. 

How do you strike the ideal balance between the income of your business or the funds you raised and the costs to keep your firm afloat? There is only one way to find out: by figuring out your unit economics. Segun Awoniyi, CEO FinRik, always emphasizes on the vitality of understanding the unit economics of your business.  Understanding whether you make a profit or lose money after selling a product unit, for example, a Wig, and paying all related expenses is the essence of unit economics. 

Variable Cost

Let us consider what "variable cost" means. Variable costs are those items whose amounts vary depending on the volume of a product. Your variable costs rise as you generate more product units, and vice versa. Various expenses include:

• cost of production's basic materials
• Package charges
• Shipment charges
• Depreciation of equipment dependent on use
• Customer credit card transaction fees
• Pay for labor, assuming hourly workers

From the listed items, you will agree that if you increase your production amount from 500 to 2000, it means you will pay more for the packaging of the products, and you will pay your staff more especially if you get to hire more staff to meet up with the new production demand, shipment fees etc. 

Fixed Cost

Let us consider fixed costs. It is the opposite of variable cost in some way. Just like its name, you cannot decrease or remove fixed costs because they are constant.  They include lease obligations, rent obligations, your fixed staff salary, and so on.

Cost of Goods Sold

The price of the items sold (COGS). Any fixed or variable costs that are directly related to the manufacture of your products or services are all considered COGS. As an entrepreneur, you should have a clear understanding of what constitutes your COGS in order to comprehend how to calculate your unit economics. COGS differs from one startup to another. COGS for a software as a service company can consist of:

1. Your hosting expenses such as costs for cloud computing services like AWS.
2. Costs associated with using third-party APIs and SDKs i.e Payment gateways.
3. Expenses for maintaining a website. This entails data centers and servers.

Image Source: Karolina Grabowska

There are several COGS associated with unique startups. Although every startup tries to automate and digitize some of its operations, some parts of those operations are still hands-on.

Having understood the different kinds of costs. Let us move into understanding the bits and pieces of your business. A unit is a component that contributes quantifiable value to your company. 

What a "unit" refers to in FinRik shop, is one subscription-paying user. What "unit"it refers to an entrepreneur who sells beauty products is one sunscreen.  You must first evaluate your potential profit from selling your goods or services. or your gross profit, in order to determine unit economics in this situation. It is quite easy to understand.

Gross Profit = Total Sales - Total Variable Cost

Let us assume that you intend to offer Garri cups for sale on your website. One cup costs $5 to make, with $2 going toward raw ingredients and $3 going toward direct labor. Additionally, you must spend an additional $2 on shipping and delivery as well as $1 on payment processing costs. Additionally, it costs $1 on average to sell one cup through marketing and sales activities. Your variable costs will therefore be $9. Each cup can be sold for $15. Your gross profit per cup in this scenario will be $15 - $9 = $6. You must factor in your fixed costs when determining your net profit. If your fixed monthly expenses total $3,000 and include things like office rent, insurance, and taxes, salaries and so on.