How to Calculate Unit Economics for Your Health and Pharma Business

Running a health and pharma business without clear financial metrics can lead to significant challenges. It's hard to assess financial health and growth potential without understanding unit economics. This can endanger the business in a competitive market.

Unit economics is critical but often overlooked. Many health and pharma businesses must pay more attention to this crucial metric. This neglect can prevent them from making informed decisions, slow their reaction to market changes, affect cost management, and reduce profits.

The guide explains how to calculate and analyse critical financial metrics. With this knowledge, you can turn financial challenges into opportunities for growth.

Defining Unit Economics

Unit Economics involves measuring the income and costs linked to a business model for each unit. For health and pharmaceutical companies, these numbers are crucial. They affect pricing, growth potential, and profits.

Unit economics helps these companies figure out the cheapest and best ways to operate. It shows how much making and delivering each unit costs and what income each unit generates. This info helps companies make smart choices about where to put their money, what products to develop, or what prices to set.

Related Blog: What Are Unit Economics and How Are They Calculated?

What is a "Unit" in Health and Pharma?

A "unit" might mean different things depending on the company and its offerings in the health and pharma industry. Here are a few examples:

• Single Product (like a medication dose): is one pill or one bottle of medicine. Drug making is simple.

• Patient Consultation: In clinics or hospitals, a unit might be used for each patient visit or treatment. This is common, and services are charged per visit.

• Monthly Subscription: In models where customers pay monthly, a unit is one month of service. This could include several doctor visits or ongoing access to health apps.

• Treatment Course: For some treatments like chemotherapy, a unit might be the whole series of treatments needed.

Step-by-Step Calculation of Unit Economics

Calculating unit economics is critical for assessing various aspects of business performance in the health and pharma industries. Each step provides valuable insights that can guide strategic decisions and operational improvements. Here's an expanded look at each step for calculating unit economics:

1. Identify the Unit

Clearly define a 'unit' within your business model. This definition varies based on the type of business and includes:

• Single Treatment Session: For services such as clinical treatments or consultations.

• Product Unit: For tangible products, like a bottle of pills or a medical device.

• Subscription Period: For digital health services or subscription-based access to medical facilities.

This step is crucial because it sets the foundation for measuring everything from revenue to costs and profitability on a per-unit basis.

2. Calculate Revenue Per Unit

Calculate the revenue generated by each unit over a specific period. This includes all income streams associated with a unit:

• Direct Payments from Customers: Payments made at the point of sale or service delivery.

• Insurance Reimbursements: Payments received from insurance companies for covered services or products.

• Subscription Fees: Regular payments made by customers for ongoing access to health services or products.

Understanding revenue per unit helps in assessing the direct financial benefit each unit brings to the business.

3. Determine Direct Costs Per Unit

Identify all costs directly associated with the production and delivery of each unit. These costs typically include:

• Manufacturing Costs: Expenses related to the production of physical goods, such as raw materials and labour.

• Personnel Costs: Salaries and wages for staff directly involved in delivering or producing the service or product.

• Operational Expenses: Costs incurred from utilities, maintenance of equipment, and other necessities that keep services operational.

This assessment is vital for understanding the cost structure and finding ways to optimise spending or enhance efficiency.

4. Compute Net Profit Per Unit

Subtract the direct costs from the revenue for each unit to find the net profit per unit. This figure indicates the profitability of each unit sold or service provided and is essential for evaluating the financial health of specific offerings.

5. Analyse Customer Acquisition Cost (CAC)

Calculate the total marketing and sales costs to acquire new customers. This cost should be carefully managed to ensure it is within the lifetime revenue expected from each customer, which would undermine profitability. Factors influencing CAC include:

• Marketing Campaigns: Costs of advertising and promotional activities.

• Sales Team Efforts: Compensation and expenses related to the sales team's operations.

6. Customer Lifetime Value (LTV)

Estimate the total revenue expected from a typical customer throughout their relationship with your company. LTV calculations help determine how much the company should invest in acquiring and retaining each customer while maintaining profitability. Components of LTV include:

• Recurring Revenue: Regular payments from long-term customers.

• Upsells and Cross-sells: Additional revenues generated through upgraded services or complementary products.

7. LTV to CAC Ratio

This ratio compares the Lifetime Value of a customer to the Cost of Acquiring them. A healthy ratio in the health and pharma industry is typically around 3:1, suggesting that the revenue from a customer is three times the cost to acquire them. This ratio is a crucial indicator of the effectiveness of marketing strategies and the overall financial sustainability of customer acquisition models.

Importance of Unit Economics in Health and Pharma

Unit economics is vital for tracking profits and making intelligent choices in the health and pharma sectors. Here's how it affects various business areas:

• Adjusts Pricing Strategies

Understanding profit per unit helps health and pharma companies fine-tune their prices. They look at different price levels and models to boost revenue while keeping their spot in the market. Firms study the costs and earnings of different pricing options to spot the most profitable one. For instance, lower prices help break into new markets, while higher prices attract customers seeking specialised products.

This method lets companies keep prices in check and change them quickly if the market or rules change. It ensures that pricing strategies help meet the company's wider goals.

• Evaluates Financial Health

Unit economics clearly shows financial health and business efficiency. It shows the direct costs and revenues from each item sold, helping businesses see how well they use their fixed costs in production and marketing.

It acts as an early alert system, pointing out money issues before they grow big. For example, if unit costs rise without more revenue, it might signal problems in the supply chain that need quick action.

• Supports Scaling Decisions

Unit economics also helps decide whether to expand operations. Based on their current profits and financial health, it tells companies if they can afford to grow. This is crucial in health and pharma, where growth often means significant investments in research and compliance.

These metrics help businesses in choosing to enter new markets or boost production. They ensure expanding will bring in more money than it costs. For instance, a pharma company looking to move into a new region will check if the potential sales there will cover the costs of starting up and meeting local health rules.

Wrapping Up

Mastering how to calculate unit economics for your Pharma Business is more than a financial exercise—it's a cornerstone of strategic planning. It ensures that every decision, from pricing to customer acquisition, is made with a clear understanding of its financial impact. This knowledge not only secures the economic health of your business but also positions it for sustainable growth and success in the competitive health and pharma market.

Want to learn more about unit economics and its impact on your health and pharma business? Check out GrowthJockey, your expert resource for strategic guidance and tools. Learn how mastering unit economics can change your business decisions and help your business grow.

FAQs

1. How does understanding unit economics help investors in health and pharma?

Unit economics shows if a business will likely give a good return on investment. Investors use this info to choose the best places to put their money in the sector.

2. How does knowing unit economics help pharma companies with regulatory costs?

Unit economics helps pharmaceutical companies manage costs linked to meeting regulatory standards. By knowing the cost per unit, companies can budget smartly, helping ensure compliance costs don't harm overall financial health.

3. How does unit economics influence new drug development?

Unit economics gives important insights for developing new drugs and treatments. By understanding costs and potential earnings per unit, companies can focus on the most promising projects.

This approach aligns development with business goals and market needs, boosting the success rate of new products.