Unit Economics: Analyse, Optimise, Grow
Unit Economics: the direct revenues and costs associated with a particular business model, expressed on a per unit basis.
Think. 🤔 Idea. 💡 Create Business. 👨💼 Raise investment (maybe). 💰 Spend money > Make money. 💸 Go bust. 💥
This simplified, emojified checklist is all too common in the startup world. It's something Eric Ries warned of in the Lean Startup movement. Ill defined, unrealistic targets are set by investors who want to see a return on their investment putting pressure on the executives to grow the business at all costs.
The basic fact of business: earn more than you spend, goes flying out of the window to be replaced by frivolous spending and unrealistic, unfounded dreams of being the next big thing. Buy customers now, prove the model later. Let's see what this looks like:
"But, we have 50,000 downloads!".
"Ah great, sounds like you're doing well. How many daily active users?"
"And how's your Lifetime value per customer looking?"
"Well, we're currently just focused on getting more customers to build our userbase numbers."
What do you prove in this situation? That you can spend money on buying new customers ... great 🙄. An audience doesn't matter if they aren't going to stick around and give you a return.
Targets should not be defined by cumulative vanity metrics, but nor should they necessarily be defined by number of new customers, or growth in number of customers. Rather, it should be based on proving your business model and your product works on a small scale, whilst remaining realistic about your ability to scale.
What does this actually mean? It means you must be accurately tracking your unit economics: how much does it cost you to acquire the next customer? How much will that customer bring to you in revenue across their lifetime?
Some Key metrics to track:
Cost of Acquisition (CAC) = Total £ Spend on Marketing & Sales in Period
Total Number of New Customers Acquired in Period
Lifetime Value (LTV) = Gross Margin % x (1 / Monthly Churn) x Average £ Revenue per Customer
LTV:CAC Ratio - this should ideally be 3:1
Payback Period (months) = CAC / (Average Deal Price x Gross Margin %) x 12
There is a really useful spreadsheet I use where you just have to plug in your Cost and Revenue figures and it calculates your CAC and LTV for you. Get in touch and I'll ping it over to you!
Lock down your Unit Economics before spending money on scaling - prove you're product or service is good enough to ensure customers stick around once you've spent money on acquiring them. Money will go down the drain. Don't work it out later, it gets difficult at scale.
Get on this now before it's too late. You'll better understand the internal engine of your business: when to apply the brakes to spending ✋, and when to hit the gas on growth 📈.