Unit Economics - Rick Rasmussen

1. UNIT ECONOMICS © 2019 Rick Rasmussen

2. UNIT ECONOMICS
Fundamental building block
of any financial model
What does it take to
build and sell one?
 One product delivered
 One software license
 One job completed
 One client serviced

3. UNIT ECONOMICS
Unit Revenue
minus Unit Costs
equals Unit Profit

4. UNIT ECONOMICS
Unit Revenue
minus Unit Costs
equals Unit Profit
*** Ignore fixed costs such as
salary, rent, marketing campaigns.
We cover those later when building
a full P&L.

5. WHAT DO VCS WANT?
What you pitch
 Market Opportunity
 Product/Service Overview
 Key Players
 Stage of Development
 Financial Projections
 Competitive Landscape
 Future Plans

6. WHAT DO VCS WANT?
What you pitch
 Market Opportunity
 Product/Service Overview
 Key Players
 Stage of Development
 Financial Projections
 Competitive Landscape
 Future Plans
What they think:
Is there real money here?
How much money?
Are these the people who will
make me money?

7. WHY ARE UNIT
ECONOMICS
IMPORTANT?
The key points of a
business’ financial
model will make
more sense
To determine
break-even points
and contribution
margins
For calculation of
return on investment
and other
profitability tests
Forecasting or
predicting the
future company
profitability

8. CREATING FINANCIALS
8
in $M Yr 1 Yr 2 Yr 3 Yr 4 Yr 5
Revenue $0.1 2.5 $17.4 $31.5 $49.2
COGS 0.2 1.0 7.2 11.8 16.4
Gross
Profit
(.02) 1.4 10.1 19.7 32.8
Expenses 2.4 6.2 10.1 15.1 21.1
Net
Profit
($2.4) ($4.7) $0.05 $4.5 $11.6

9. TODAY’S TOPIC
9
in $M Yr 1 Yr 2 Yr 3 Yr 4 Yr 5
Revenue $0.1 2.5 $17.4 $31.5 $49.2
COGS 0.2 1.0 7.2 11.8 16.4
Gross
Profit
(.02) 1.4 10.1 19.7 32.8
Expenses 2.4 6.2 10.1 15.1 21.1
Net
Profit
($2.4) ($4.7) $0.05 $4.5 $11.6
Unit Economics are
a building block to
full financials

10. IT ALL STARTS WITH A BUSINESS / REVENUE MODEL
Bricks & Clicks
Collective
Cut out the Middle Man
Direct Sales
Distribution Model
Value-Added Reseller
Free-in, free-out
Freemium
Auction / Online Auction
All-in-One
Low-Cost Barrier
Loyalty
Monopolistic
Multi-level Marketing
Network Effects
Pro Open Source
Pyramid Scheme
Razors & Blades
Servitisation of Products
Subscription
And more, and more…

11. BUSINESS MODEL, REVENUE MODEL

12. CANVAS: TRADITIONAL VIEW
Business Model
Revenue Model

13. CANVAS: VALUE CREATION → VALUE EXTRACTION
Business Model Revenue Model

14. CANVAS: UNIT ECONOMICS
Business Model Revenue Model
Unit
Costs
Unit
Revenue

15. PRIMARY BUSINESS MODELS
Product
Tangible Solution
Design once, sell many
Service
Custom Solution
Intangible Value
Trade
Connect Buyers and Sellers
Product
Service Trade

16. SECONDARY BUSINESS MODELS
Combining primary business modes in groups
Product Service Trade
Subscription x x
Marketplace x x
Brokerage x x
Ecosystem x x x
Product
Service Trade

17. REVENUE MODELS DRIVE UNIT ECONOMICS
Type Business Revenue Model Example
Primary
Product Sales One time sale Presentation Clicker
Service Sales Hourly Rate Consultant
Trade Resale Retail Sales
Derivative
Subscription Monthly Revenue Software as a Service
Marketplace Transaction Fees Ebay, Etsy
Brokerage Commission Fees Real Estate
Ecosystem Combination Apple

18. REVENUE MODELS DRIVE UNIT ECONOMICS
Type Business Revenue Model Example
Primary
Product Sales One time sale Presentation Clicker
Service Sales Hourly Rate Consultant
Trade Resell Retail Sales
Derivative
Subscription Monthly Revenue Software as a Service
Marketplace Transaction Fees Ebay, Etsy
Brokerage Commission Fees Real Estate
Ecosystem Combination Apple

19. PRODUCTS
A tangible good sold on a one-time fee
basis (purchase or license).
Requires high up-front sunk capital but is
able to leverage economies of scale.
Up-front Investment
Sell for One-time Fee
Highly Scalable
Product
Examples:
Clickers, Fidget Spinners
Software
Content

20. Example: Product Sales
Behold the lowly clicker

21. Getting into the
Clicker business
What type of
business?
Existing?
Re-segmented?
New?

22. Getting into the
Clicker business
What’s the
TAM?
Is the market
large enough to
care about?

23. Retail price: $35
Channel Margin: - $19
Wholesale price $16

24. Retail price: $35
Channel Margin: - $19
Wholesale price $16
You typically don’t control this…
Revenue that comes to the company

25. UNIT ECONOMICS
1. Unit Price $16
2. Each unit has a Cost
This is your variable cost
Also called COGS for Cost Of Goods Sold

26. UNIT COST
Subsystem Cost
Housing $1.50
Electronics + Laser $2.50
Battery $0.25
Packaging, manual $1.00
Wireless Module $1.75
Total Unit Cost $7.00
Draw a Circle around the Unit.
What does it directly cost to produce?

27. UNIT PROFIT
This is the profit you make per unit sold
Unit Price
minus Unit Cost
UNIT PROFIT

28. UNIT PROFIT
Profit made per unit sold:
Average Selling Price (ASP): $16.00
Average Unit Cost: - $7.00
Unit Profit: $9.00

29. UNIT PROFIT MARGIN %
Percent profit margin =
(Revenue – cost) / Revenue =
Profit / Revenue =
$9 / $16 = 56.25%
Is this good?
43.75%
56.25%
Revenue
Unit Costs
Unit Profits

30. WE’RE DONE…!
We’ve identified
“The Unit” A clicker
Form of revenue One-time sale
Price $16
Cost $7
Profit $9
Profit Margin 56.25%

31. REVENUE MODELS DRIVE UNIT ECONOMICS
Type Business Revenue Model Cost Model
Primary
Product Sales One time sale COGS
Service Sales Hourly Rate Hourly Cost
Trade Resell COGS
Derivative
Subscription Monthly Revenue CAC
Marketplace Transaction Fees open
Brokerage Commission Fees open
Ecosystem Combination open

32. SERVICE
Intangible work for a client,
monetized on a per-use basis.
Low sunk costs but high float
cost requirements.
Intangible Value Creation
Low Sunk / High Float Cost
Service
Examples:
Law Firm
Janitorial Services
Outsource
Developers

33. Law Firm
Unit: Hourly Billings
Billing Rate
- Hourly Pay
Hourly Profit
SERVICE EXAMPLE

34. Billing Rate $300
- Hourly Pay $200
Hourly Profit $100
Profit Margin = 100/300
= 33%
SERVICE EXAMPLE

35. SERVICE BUSINESSES
COGS are people
providing services
Low-leverage on resources
May not scale
Automation can improve
service capacity and
lower costs
People
Revenue
People

36. REVENUE MODELS DRIVE UNIT ECONOMICS
Type Business Revenue Model Example
Primary
Product Sales One time sale Presentation Clicker
Service Sales Hourly Rate Lawyers
Trade Resell Retail Sales
Derivative
Subscription Monthly Revenue Software as a Service
Marketplace Transaction Fees Ebay, Etsy
Brokerage Commission Fees Real Estate
Ecosystem Combination Apple

37. TRADE
Buying goods (inventory) and selling to
customers
Profit on spread between price and cost
Requires moderate capital and good
sourcing connections
Profit from Arbitrage
Trade
Examples:
Retail Stores
Fruit Market
Online Retailers

38. TRADE BUSINESS
Requires both supply (goods) and demand
(customers)
Key supply relations are key to stability and
builds barriers to entry
Inventory costs, spoilage and cash flow all
come into play

39. Gross Sales
- %Returns/Spoilage
Net Sales
- COGS
Net Profit
TRADE CALCULATIONS

40. TRADE CALCULATIONS
Gross Sales
- %Returns/Spoilage
Net Sales
- COGS
Net Profit

41. A Unit 0.28€
- % Spoilage 10%
Gross Revenue 0.25€
- COGS - 0.15€
Gross Profit 0.10€
TRADE EXAMPLE: A BANANA
Gross Margin = 0.1 / 0.28
= 35.7%

42. REVENUE MODELS DRIVE UNIT ECONOMICS
Type Business Revenue Model Cost Model
Primary
Product Sales One time sale COGS
Service Sales Hourly Rate Hourly Cost
Trade Resell COGS
Derivative
Subscription Monthly Revenue CAC
Marketplace Transaction Fees open
Brokerage Commission Fees open
Ecosystem Combination open

43. SUBSCRIPTION
Ongoing use of a product,
rather than a one-time sell.
Customers pay a monthly
subscription service and
benefit from continued
improvements.
Customer Acquisition Cost
Customer Lifetime Value
Product
Service
A Subscription
Examples:
Software as a Service
Salesforce
Quickbooks online
Content as a Service
Spotify
Audible
Hardware Products
Mobile phones
Satellite TV

44. SUBSCRIPTION UNIT ECONOMICS
Customer Acquisition Cost Cost to bring you on board. Advertising,
(CAC) Sales Time, Discounts, Free HW, etc.
Customer Lifetime Value Total margin $ that a customer is worth
(CLV) over the lifetime of the relationship
Monthly Run Rate Amount of margin earned in a given month
(MRR)
Churn % of customers lost each month
Unit = one customer. What is a customer worth to you?

45. SUBSCRIPTION BUSINESS EXAMPLES
Cell phones
Cable Service
Internet Service
Cloud Storage
Enterprise Software
Typically annual contracts
Pay monthly
High switching costs

48. CUSTOMER ACQUISITION COST
Stage Expense Number CAC
Start Marketing Spend $1000
Result Customers Acquired 5 $200
𝐴𝑔𝑔𝑟𝑒𝑔𝑎𝑡𝑒 𝐶𝐴𝐶 =
𝑆𝑢𝑚 𝑜𝑓 𝑎𝑙𝑙 𝑆𝑎𝑙𝑒𝑠 & 𝑀𝑎𝑟𝑘𝑒𝑡𝑖𝑛𝑔 𝑒𝑥𝑝𝑒𝑛𝑠𝑒𝑠
𝑁𝑜 𝑜𝑓 𝑛𝑒𝑤 𝐶𝑢𝑠𝑡𝑜𝑚𝑒𝑟𝑠 𝐴𝑑𝑑𝑒𝑑

49. CUSTOMER ACQUISITION COST
$200 per customer?
Woo Hoo!

50. CUSTOMER ACQUISITION COST
$200 per customer?
Woo Hoo!
$200 per customer?
Oh No!

51. CUSTOMER LIFETIME VALUE
𝐶𝐿𝑉 = 𝐶𝑢𝑠𝑡𝑜𝑚𝑒𝑟 𝑃𝑟𝑜𝑓𝑖𝑡/𝑚𝑜𝑛𝑡ℎ × 𝐶𝑢𝑠𝑡𝑜𝑚𝑒𝑟 𝐿𝑖𝑓𝑒𝑡𝑖𝑚𝑒
𝐶𝐿𝑉 = $500/month × 50 months = $25𝐾
Example:
The amount of margin generated over the
“lifetime” of your engagement with a customer
Base Equation:

52. CHURN-BASED CLV CALCULATIONS
In SaaS, GPM is > 80% so OK to drop out of estimates
𝑒𝐿𝑇 =
1
𝐶ℎ𝑢𝑟𝑛%
𝐶𝐿𝑉 =
𝐴𝑅𝑃𝑈
𝐶ℎ𝑢𝑟𝑛%
𝑒𝐿𝑇 =
1
2%
= 50 months
𝐶𝐿𝑉 =
𝐴𝑅𝑃𝑈 × 𝐺𝑟𝑜𝑠𝑠 𝑀𝑎𝑟𝑔𝑖𝑛%
𝐶ℎ𝑢𝑟𝑛%

53. MOBILE PHONE BUSINESS EXAMPLE
Customer Acquisition Cost (CAC)
Marketing Spend: $500
Phone Subsidy + $500
Customers: ⌯
5
Customer Acquisition Cost: $200

54. MOBILE PHONE BUSINESS EXAMPLE
Customer Acquisition Cost (CAC)
Marketing Spend: $500
Phone Subsidy + $500
Customers: ⌯
5
Customer Acquisition Cost: $200
Customer Lifetime Value (CLV)
Lifetime: 5 years
(60 months)
Margin/Month: x 20
Customer Acquisition Cost: $1200

55. MOBILE PHONE BUSINESS EXAMPLE
Customer Acquisition Cost (CAC)
Marketing Spend: $500
Phone Subsidy + $500
Customers: ⌯
5
Customer Acquisition Cost: $200
Customer Lifetime Value (CLV)
Lifetime: 5 years
(60 months)
Margin/Month: x 20
Customer Acquisition Cost: $1200
CAC x 6 = CLV

56. RULES OF THUMB FOR
SUBSCRIPTION BUSINESSES
1. Look to cover CAC within the
first contract period.
 E.g. if running on annual contracts, try
to recover CAC in ~ 9 months
2. 3x CAC < CLV
3. Monthly Churn < 2%

59. Marketing Automation

60. REVENUE MODELS DRIVE UNIT ECONOMICS
Type Business Revenue Model Cost Model
Primary
Product Sales One time sale COGS
Service Sales Hourly Rate Hourly Cost
Trade Resell COGS
Derivative
Subscription Monthly Revenue CAC
Marketplace Transaction Fees open
Brokerage Commission Fees open
Ecosystem Combination open

61. MARKETPLACE
A trade platform that connects buyers and sellers
Paid a service fee by one or both sides
This is a network effects business.
A two-sided marketplace.
Examples:
 Amazon, Alibaba, eBay, Etsy
 Flea markets
 Auction sites
Product
TradeA Marketplace

62. UNIT ECONOMICS: MARKETPLACE
[A Unit Sold]
x % paid to you by buyer
+ x % paid to you by seller
= Unit Revenue
- Unit Transaction Cost (credit cards, bank fees, shipping)
= Unit Profit

63. WAYS TO GENERATE REVENUE IN A MARKETPLACE
1. Sign up fees
2. Subscription business model
3. Product listing or insertion fees
4. Selling fees
5. Transaction or payment processing fees
6. Sponsored products and stores
7. Ads from third party advertisers
8. Pay per lead or lead fees
9. Bidding fees for auction marketplaces
10. Grow your marketplace through
affiliates and referrals

64. REVENUE MODELS DRIVE UNIT ECONOMICS
Type Business Revenue Model Cost Model
Primary
Product Sales One time sale COGS
Service Sales Hourly Rate Hourly Cost
Trade Resell COGS
Derivative
Subscription Monthly Revenue CAC
Marketplace Transaction Fees open
Brokerage Commission Fees open
Ecosystem Combination open

65. BROKERAGE
A service business that arranges
transactions between buyers and sellers
Paid on transactions by retainer,
percentage, etc.
Examples:
Stock Brokers
Real Estate Brokers
Ad Networks
Service Trade
A Brokerage

66. BROKERAGE MODEL
A broker/matchmaking business
model is often a multi-party
arrangement where a firm identifies
two (or more) different customer
groups and brings them together on
its digital or physical marketplace.
Many dating platforms are based on
this model.

67. UNIT ECONOMICS: BROKERAGE
[A transaction]
Listing Fees
+ Commissions
= Unit Revenue
- Unit Transaction Cost
= Unit Profit
Listing fees,
Advertisements,
Contracts and legal fees,
Credit cards,
Bank fees,
Shipping

68. UNIT ECONOMICS: TYPES OF BROKERAGES
Marketplace
Exchange
Business Trading
Community Buy/Sell Fulfillment Demand Collection
System
Auction Broker Transaction Broker Bounty Broker Distributor
Search Agent Virtual Mall

69. REVENUE MODELS DRIVE UNIT ECONOMICS
Type Business Revenue Model Cost Model
Primary
Product Sales One time sale COGS
Service Sales Hourly Rate Hourly Cost
Trade Resell COGS
Derivative
Subscription Monthly Revenue CAC
Marketplace Transaction Fees open
Brokerage Commission Fees open
Ecosystem Combination open

70. ECOSYSTEM
A mature market leader may
expand as a result of success.
They develop a marketplace
and/or community for customers
and/or service/support vendors
to offer augmented solutions.
User Community
ISV or Dev Community
Enhanced Product Marketplace
Product
Service Trade
An Ecosystem
Examples:
Apple, Microsoft
Facebook, Yelp

71. ECOSYSTEM BUSINESS
Can monetize from any or all of the three resources
1. Product purchasers
2. Service consumers
3. Trade beneficiaries
With proper leverage, can extract monopolistic rates
Product
Service Trade
An Ecosystem

72. UNIT ECONOMICS: ECOSYSTEM
Complex ecosystems capture
mindshare
Elements of:
 Product
 Service
 Trade
Strives for Higher Value
than individual pieces
Licensing platforms typically need to conform
to “fair and equitable treatment” doctrines

73. ALTERNATE REVENUE MODELS
Freemium Upgrades based on Trigger Points
Bait and Hook Modeled as Product or Subscription
Everything as a Service One time vs. Subscription
Pay per Use Product or Service

74. SUMMARY
Unit economics are the fundamental
building block to derive your financials
Many ways to make money
Follow existing business / revenue models
to establish the basics
Product, Service, Trade, Subscription,
Marketplace, Brokerage, Ecosystem
Building Financials keynote next
Wednesday

75. QUESTIONS?