For many small and medium-sized enterprises (SMEs) in Zambia, business decisions often focus on revenue growth, sales numbers, and customer acquisition. While these metrics are important, one critical aspect is frequently overlooked: unit economics. Understanding unit economics is not just a finance exercise—it’s the difference between running a business that survives and one that thrives.

What are unit Economics?

Unit economics is the study of the direct revenues and costs associated with a single unit of product or service sold. In simpler terms, it helps you understand whether your business makes money on each sale, after accounting for all the costs directly tied to producing and delivering that product or service.

Think of it as examining the financial health of your business at the most fundamental level: per customer, per product, per transaction. If you understand your unit economics, you can make informed decisions about pricing, marketing, scaling, and investment.

Why unit economics matters for Zambian SMEs

Many businesses in Zambia focus on growing sales volumes or expanding quickly without knowing whether each sale is profitable. This can lead to situations where:

• You are selling more but losing money on each unit.

• Marketing and acquisition efforts appear successful but fail to generate sustainable profits.

• Scaling prematurely leads to cash flow crises because the business is not profitable at a unit level.

Unit economics is crucial because it helps business owners answer fundamental questions:

• Are you pricing your products correctly?

• Are your customer acquisition strategies sustainable?

• Can you afford to scale your business without external funding?

By understanding the economics of each unit you sell, you make data-driven decisions that ensure long-term profitability and growth.

How to think about unit economics

At its core, unit economics boils down to two key components:

1. Revenue per unit – How much money you earn from selling a single product or serving a single customer.

2. Cost per unit – The total cost directly associated with producing or delivering that product/service.

From these, we derive contribution margin, which is the profit you earn per unit before accounting for fixed costs like rent, salaries, or utilities.

Contribution Margin = Revenue per Unit – Variable Costs per Unit

If your contribution margin is positive, each sale contributes to covering your fixed costs and generating profit. If it’s negative, your business loses money with each transaction, regardless of sales volume.

Understanding unit economics across business types

Different types of businesses require slightly different approaches to unit economics.

• Product-Based Businesses
  For SMEs selling physical goods, variable costs include raw materials, production, packaging, shipping, and sometimes commissions to sales agents. Understanding how much profit each product generates is critical before increasing production or launching new marketing campaigns.

• Service-Based Businesses
  For SMEs providing services, costs might include labor hours, technology costs, transportation, and consumables. Unit economics here helps you determine the profitability per client or per project, ensuring that your service delivery model is sustainable.

• Subscription or Recurring Revenue Models
  Businesses like gyms, software services, or membership-based platforms need to calculate Customer Lifetime Value (CLV) and Customer Acquisition Cost (CAC). The difference between CLV and CAC is the unit economics that drives profitability. If acquiring a customer costs more than what they will pay over their lifetime, the model is unsustainable.

Five questions every SME should ask about their unit economics

To make unit economics actionable, here are key questions every business owner should consider:

1. How much does it cost to produce or deliver one unit?
   Include materials, labor, commissions, and shipping, or direct service costs.

2. How much revenue does one unit generate?
   Consider the selling price, discounts, and any additional fees your customer pays.

3. What is my contribution margin per unit?
   This is the profit after variable costs but before fixed overheads.

4. How long will a customer stay or repeat purchases?
   Understanding this helps in estimating Customer Lifetime Value, especially for services or subscription models.

5. How much does it cost to acquire a customer?
   Marketing, sales commissions, and promotions all factor into whether acquiring a customer is profitable.

Answering these questions gives clarity on whether your business model works, where efficiencies can be improved, and how to grow sustainably.

Practical tips for You

• Track costs meticulously: Many SMEs underestimate hidden costs like transportation, packaging, or even staff time. Detailed cost tracking is essential.

• Reevaluate pricing regularly: Inflation, exchange rate fluctuations, and market demand can make previously profitable products unprofitable. Adjust pricing strategically.

• Focus on profitable customers: Not every customer generates the same value. Understand which segments are the most profitable and focus marketing and service efforts there.

• Test before scaling: Run small pilot campaigns to understand unit economics before committing to large-scale expansion.

• Invest in automation and efficiency: Reducing variable costs through better technology or processes improves unit economics without increasing revenue.

Final Thoughts

Unit economics is not just a theoretical concept for finance experts, it is a practical framework that empowers business owners to make smarter, more sustainable decisions. For SMEs, understanding unit economics is especially critical in a market where cash flow challenges, pricing pressures, and operational inefficiencies can make or break a business.

By focusing on the profitability of each unit sold, you gain the insight necessary to grow your business sustainably, make informed investment decisions, and ensure that every customer contributes positively to your bottom line.

In short, paying attention to your unit economics today is a step toward building a profitable, scalable, and resilient business tomorrow.