Build a unit economics model

Who this is for

Founder led lower-middle market companies with 5 to 50 million in annual revenue that want to test pricing and cost scenarios before scaling.

The quick answer

Define one unit. A product unit, a project, or a contract month. List revenue per unit, direct costs, and contribution margin. Add acquisition cost and payback if revenue repeats. Use the model to test price, discount, and cost scenarios before you hire or invest.

The method in eight steps

Choose the unit
Pick the level that repeats. For services use a project or a contract month. For products use a unit shipped or an installed system.
Set the revenue line
List price, typical discount, and expected usage or scope that drives revenue.
List direct costs
Materials, delivery labour, shipping, partner fees, and warranty or rework.
Calculate contribution margin
Revenue minus direct costs. Express as a percent and a dollar per unit.
Add selling cost per unit
For recurring models include acquisition cost and expected success cost to keep the account.
Model payback and lifetime
For recurring revenue compute months to recover acquisition cost and a simple lifetime value based on churn and expansion.
Test scenarios
Increase price, lower discount, change service level, or remove a low value feature. See effects on contribution and payback.
Write guardrails
Name minimum acceptable contribution margin and maximum payback. Use these to approve deals and to shape offers.

Example

A twenty seven million services firm used a contract month as the unit. By moving a feature to a higher tier and raising list price by three percent, contribution per month rose while payback stayed under six months.

Pitfalls and fixes

Units that do not match how work repeats. Choose a unit that maps to billing.
Missing rework cost. Include warranty and revisit periods.
Complex models nobody uses. Keep it in a single tab with clear inputs.

Checklist

Unit defined
Revenue and direct cost lines complete
Contribution and payback calculated
Two scenario tests documented
Guardrails published for approvals