1. What you will learn
This lesson sets the outcomes you want from unit economics and runs a five-ratio diagnostic on your business. You will learn which ratios tell you the most, how to compute each from your records, and how to decide which one to work on first.
2. The idea explained
A diagnostic in this programme is a short list of ratios that summarise the health of one unit. Five are enough to begin. The first is contribution margin, the share of revenue left after direct costs. The second is the coverage of fixed costs, meaning how many times the total contribution covers the fixed costs, or, put differently, how far above or below break-even you are. The third is acquisition cost against first-order contribution, which shows whether a new customer repays quickly or slowly. The fourth is the repeat rate, the share of customers who buy again in a period. The fifth is cash timing, the number of days between paying for a unit's costs and receiving the money.
Each ratio points to a different kind of problem. A low contribution margin points to price or direct cost. Weak coverage points to volume or fixed cost. A high acquisition cost relative to contribution points to marketing or conversion. A low repeat rate points to product, service or follow-up. Long cash timing points to terms with customers and suppliers. By computing all five, you can see the weakest link, instead of guessing.
Outcomes come next. State them in numbers with dates. For example: raise contribution margin from 28 to 32 per cent within six months by renegotiating packing costs; cut acquisition cost to below the first-order contribution times two by year end; raise the repeat rate from 30 to 40 per cent in the coming quarter. Each outcome should be specific, measurable, within your influence, and dated. Avoid outcomes that depend on the market alone, such as double revenue.
Recognise that ratios interact. Raising price improves margin but may reduce volume and worsen coverage. Cutting marketing lowers acquisition cost per customer but may reduce new customers. A diagnostic is therefore a starting map, not a set of separate targets to push in isolation. Later lessons will show how to test the interactions with sensitivity.
Finally, treat the results with caution. Ratios computed from small samples or short periods are noisy. Mark each as exact, estimated or unknown, and note the sample. Most ventures fail, and none of these ratios can predict yours. They tell you where to look first.
Apply it
3. How to apply it in your own business
Open your baseline sheet and compute the five ratios. Contribution margin: contribution per unit divided by net revenue per unit. Coverage: total contribution for the period divided by total fixed cost for the period. Acquisition against first-order contribution: acquisition cost divided by contribution on a first order. Repeat rate: customers who bought again in the period divided by customers who bought in the previous period. Cash timing: average days from paying suppliers to receiving customer money.
Rate each ratio as strong, acceptable or weak using your own judgement and the reasoning behind it, not a benchmark copied from elsewhere. Write one sentence of evidence for each rating. Choose the weakest one and the one that is cheapest to improve; these may be the same.
Write two or three outcomes with numbers and dates. For each, write the smallest action you could take this month to test the idea. Share the page with your witness, who could be an accountant or a mentor, and ask them to challenge the outcomes: are they within your control, and are the baselines reliable? Save the page with the date. If you plan changes that involve pricing, contracts, tax invoicing or employment terms, list them under questions for a qualified adviser.
Worked example
4. Worked example
Consider Bhavesh, who runs a small furniture-polishing and repair service in Rajkot. His unit is one job. Over three months he did 90 jobs. Net revenue per job is 4,000 rupees, direct cost per job is 2,800 rupees (materials 1,200, labour 1,400, transport 200), and so contribution is 1,200 rupees. Margin is 1,200 divided by 4,000, which is 30 per cent.
Fixed costs over the three months: workshop rent 45,000, one supervisor 60,000, phone and other 15,000, total 1,20,000 rupees. Total contribution is 90 times 1,200, which is 1,08,000. Coverage is 1,08,000 divided by 1,20,000, which is 0.9. He is below break-even; the shortfall is 12,000 rupees over three months. Break-even jobs are 1,20,000 divided by 1,200, which is 100 jobs, so he needs 10 more jobs per quarter.
Acquisition cost: he spent 30,000 rupees on advertising and free estimate visits and won 40 new customers, so 30,000 divided by 40, which is 750 rupees. The first job's contribution is 1,200. The ratio is 750 divided by 1,200, about 0.63, so the first job repays acquisition, leaving 450 rupees.
Repeat rate: of 60 customers in the previous quarter, 12 came back, which is 20 per cent. Cash timing: he pays for materials on delivery and labour weekly, but customers pay on completion or within 10 days, so an average gap of about 8 days.
He rates: margin acceptable, coverage weak, acquisition strong, repeat weak, cash timing acceptable. His outcomes: reach 100 jobs a quarter within two quarters by raising the repeat rate to 30 per cent; that would add 6 jobs from 60 customers, 60 times 0.10. He also notes that referrals could add jobs. He writes that these are targets for learning and that no result is promised. He puts a question about invoicing rules to his accountant.
Bhavesh also noted a limit of his diagnostic. Three months of data, with only 90 jobs, cannot separate a real weakness from a slow season, so he wrote that the coverage figure of 0.9 might be better or worse next quarter. He decided to recompute it every month rather than wait, and to treat any single figure with humility.
5. Common mistakes and how to fix them
The first mistake is choosing outcomes that depend on the market. Fix it by choosing outcomes within your influence. The second mistake is computing ratios from a single unusual month. Fix it by using three months and noting the sample.
The third mistake is improving one ratio while damaging another. Fix it by checking the interactions before acting. The fourth mistake is copying targets from other businesses. Fix it by setting targets from your own baseline.
Key takeaways
6. Board summary
Five ratios: margin, fixed-cost coverage, acquisition against first order, repeat rate, cash timing. Each ratio points to a different kind of problem. Set numeric outcomes with dates within your control. Ratios interact; test before acting. Small samples are noisy.
Check your understanding
7. Practice and self-check
- Name the five ratios. Answer: margin, coverage, acquisition against first-order contribution, repeat rate, cash timing.
- Bhavesh's contribution per job: 4,000 minus 2,800? Answer: 1,200 rupees.
- Margin? Answer: 30 per cent.
- Coverage: 1,08,000 over 1,20,000? Answer: 0.9.
- Break-even jobs? Answer: 100.
- Acquisition cost: 30,000 over 40? Answer: 750 rupees.
- Ratio to first-job contribution? Answer: about 0.63.
- Repeat rate 12 of 60? Answer: 20 per cent.
- Extra jobs if the rate rises by 10 points? Answer: 6.
- Do these ratios predict success? Answer: no.