Understanding and correctly forecasting 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. At least we will try to make it so with an example.

In an effort to make this material easy and fun to understand, we will actually 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 place
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 on and depending on your state and geographic location can cost far over $100,000 and take 3-9 months to complete.

Video Explaining Unit Economics

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 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

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 them, you will be more ready to meet the challenge. Now we will get to some of the more encouraging parts of the business.

Unit Economics of Revenue Transactions

This is the moment we have been waiting for. Let's count how many customers we need to break even, then turn a profit. It is precisely here that you get to understand whether all the risk we outlined above will be worth the reward. Sometimes this is also useful to tell whether this business can never be profitable, but sometimes the financial opportunity really becomes clear right here. Let's get right into the calculations:

Let's say, just as an example, that you charge each user $50/month. You also have a $50 activation fee. On average, a user remains a member for 12 months.

Let's say your costs to open were $100,000 which you need to eventually recoup, and your ongoing costs are $50,000.

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, so remember to adjust for taxes and tax write-offs.

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 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 become mature and get to the 1000 customers per month and grow from there. Note that this is the good-case consideration. Many gyms never get to that many members.

Unfortunately, there will be some space constraints so the single gym cannot be home to some number of members just because it is a physical facility. 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 will switch gyms to a competitor gym a few blocks away. So there is a maximum number of members a gym can have. All this means that after a pretty long time, a gym can become profitable. But you would have to put about $300,000 or more 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 a number of the pains you went through with the first gym before it can become profitable.

Conclusion and Summing Up

Note: Some costs to start a business can be the legal costs that come with opening such a business such as the cost to incorporate in California or Nevada or wherever your business will be physically located.

Now you should see the value of thoroughly going through such unit-economics forecasting. We just 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 this section thoroughly? 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.

So as part of your planning, we really encourage you to consider the unit economics. This is something that you should be thinking about as you first get your business idea and begin the initial planning since the unit economics of your business are such a key metric. It is something that will never go away, regardless of your business stage. In fact, it will only get more and more important as your business grows so it is vital to plan ahead for it.

Unit economics as part of your business model

Here is a video tutorial on the difference between a revenue model and a business model. It also helps to explain how you can structure your own business model.

More Resources To Help You Plan And Start Your Business

I created over 70 business and marketing online courses on Udemy. Check out my full list of Udemy course coupons to see which courses might help you with your business. The course on how to start a business and the course on how to write a business model spend some time on helping you understand your company's unit economics.

In addition to the Udemy courses, I wrote over 15 business and marketing books. Yes, that is 15 books! Check out my full list of business books to see which might be more helpful to you in starting your business.

Lastly, if you need to set up and create your website, here is my tutorial on how to easily create your own Wordpress website in as little as one or two days. Here is the tutorial on how to create your website with Wordpress.

Start bringing your idea to life

You can begin working on a business idea the very same day you got the idea. Take a look at our tutorial on how to set up your site quickly (sometimes in one day) and professionally. Having a website or even a blog can help you begin to discuss your idea with others and be able to point people towards the resources on your site. A website can also help you network online and to begin to promote your business.

If you are at the idea stage, check out this article on business ideas which will help you understand what to do at the business idea stages, and how to begin planning your business. You can also check out some popular articles on business ideas that cover how to protect business ideas, and how to know which business ideas are bad or are mistakes.

And here is a video with a collection of the top 40 business idea tips:

Few Videos On Business Planning And Entrepreneurship

And this basic business planning tutorial in which you can get a sense of the importance of your company's unit economics.

And this full business planning tutorial in which you can get an even bigger sense of the importance of your company's unit economics and how to understand the single transactions and the profits and losses that go into them, and how that effects your entire business model.

Business Plan Book

Before starting a business, you must have a solid business plan that outlines a strong strategy for how you will create a competitive product, promote that product effectively, and do it all in a way that is profitable.

Check out my business plan book on Amazon. And take a look at my page that explains this book in more detail on this website before you decide if you want to visit the book listing on Amazon. Here is some more information about my business plan book.

And check out the complete list of my business and marketing books. I have over 20 books that guide you from starting your business to planning, and promoting it.

Business Coaching And 1-On-1 Help

If you feel that you would like to talk to an experienced business person about your current situation, I am available to help you as a business coach on a one on one basis. And the best part about it is that right now I am doing a promotion where you can get the initial 15 minutes for just $5. This way you have nothing to risk, and you can get to know me, and determine whether I can help you before you decide to spend any more money. For more details, check out this page where I explain how you can hire a business coach.

Take Online Business Courses

To help you better I've also created a number of online business courses that take you from the business idea stage to starting your business to growing your business, and marketing it like a professional. For a full list of courses and discounts, check out my page with my full list of Udemy course coupons.