Pricing and unit economics basics
Why this matters
Understanding how to price your product or service and knowing its 'unit economics' is crucial. It tells you if your business can actually make a profit and grow, ensuring you don't sell at a loss.
7-day study plan
- Read
Before you start selling anything, you must understand where your money goes. Every business has two main types of expenses: Fixed Costs and Variable Costs. Think of these as the 'unavoidables' and the 'usables.' Fixed costs are expenses that do not change regardless of how much you sell. If you rent a small stall at a local market in Mumbai for 500 rupees a day, you must pay that amount whether you sell one cup of lemonade or a thousand. Other examples include the salary of a helper or the cost of a wooden table you bought. These costs are 'sunk' into the foundation of your business. Variable costs, however, fluctuate directly with your production volume. If you sell more lemonade, you need more lemons, more sugar, and more paper cups. If you sell nothing, your variable cost is zero. In an Indian context, think of a street food vendor: the cart is a fixed cost, but the potatoes and oil are variable costs. To master this, start by listing every single thing you need to spend money on. Label them clearly. If the cost stays the same every month even if you take a holiday, it is Fixed. If the cost goes up every time a customer walks in, it is Variable. Knowing this distinction is the first step to ensuring your business does not collapse under its own weight.
DoList all costs (fixed, variable) for a hypothetical lemonade stand business, differentiating between them.
Check yourself- Can you identify two fixed costs for a student-run t-shirt business?
- Why is sugar considered a variable cost for a lemonade stand?
- What happens to fixed costs if you double your sales?
Revision notes
- Fixed costs (e.g., rent) don't change with how much you produce, while variable costs (e.g., raw materials) do.
- Unit cost is the total cost incurred by a company to produce, store, and sell one unit of a product.
- Pricing strategies include cost-plus (add markup to cost), value-based (price based on perceived value), and competitive (match rivals).
- Revenue per unit is the money you earn from selling one item.
- Profit per unit is the revenue per unit minus the cost per unit; it shows how much you gain on each sale.
- Gross margin is the revenue minus the cost of goods sold, expressed as a percentage.
- Unit economics is the direct revenues and costs associated with a business's primary unit.
- Understanding unit economics helps you know if your business model is sustainable and scalable.
Global case studies
Jio's Disruptive Pricing Strategy
When Jio launched in 2016, it offered free voice calls and extremely cheap data for months, then introduced highly competitive pricing plans. This strategy rapidly acquired millions of customers, disrupting the Indian telecom market. The low unit cost of data for Jio (due to new infrastructure) allowed them to price aggressively.
Takeaway: Disruptive pricing, based on a lower unit cost or a different business model, can quickly capture market share.
Netflix's Subscription Model Success
Netflix moved from DVD rentals to a streaming subscription model, offering unlimited content for a fixed monthly fee. Their unit economics revolve around the cost of content acquisition and delivery per subscriber. As their subscriber base grew, their average cost per subscriber (unit cost) for content decreased, allowing them to invest more and offer better value.
Takeaway: Subscription models can offer predictable revenue, and scaling customers can improve unit economics by spreading fixed costs.
Try this week
Choose a common school canteen item (e.g., a samosa or a packet of juice). Research its ingredient costs and other associated expenses (e.g., packaging, vendor's profit margin if applicable). Calculate its estimated unit cost and suggest a fair selling price for students, explaining your pricing strategy.
Chapter test
One combined MCQ test for all 10 lessons in this chapter. 1 mark per question, no negative marking. Score 60% or more to unlock your certificate.
Chapter test