Ola/Uber – profit per ride Zomato/Foodpanda – profit per delivery/transaction FreshMenu – profit per delivery
Higher losses in initial days – need to look at feasibility of business model Depends on business model – customer, transaction, employee
Capital Expenditures: The up front capital cost to create the unit. For an infrastructure style unit economic model, this would be the capital expenditures required to build the unit. CAC: The initial, pre-revenue cost to acquire a customer. For a customer unit economic model, this is the fully loaded customer acquisition cost, including variable sales, marketing, and implementation costs that can be directly attributable to customer acquisition and on boarding. Marginal Operating Costs: This is the ongoing marginal cost to serve the customer or to operate the infrastructure over the life of the unit. Maintenance CapEx: Physical assets degrade over time. As a result, for an infrastructure business, it is important to factor maintenance CapEx into the unit economic model. This is the amount of CapEx required over time to keep the infrastructure operating at a suitable service delivery quality. On the in-flow side, the inputs include: Duration: When building a unit economic model, it is important to know the usable life of the unit. In an infrastructure model this is the useful life of the asset, factoring in the maintenance CapEx. In a customer unit model, this is the average customer life. Duration or Average Customer Life in a customer-driven unit model is the flip-side of churn-rate, where the relationship between the two is captured by the following equation:
Lifetime value is the present value of the future net profit from the customer over the duration of the relationship It helps determine the long-term value of the customer and how much net value you generate per customer after accounting for customer acquisition costs (CAC). It is NOT gross margin per customer. Assumptions? Correlations? – If you try to raise ARPU (price) you will naturally increase churn. If you try to grow faster by spending more on marketing, your SAC will rise Churn may rise also, as a more aggressive program will likely capture customers of a lower quality CAC/ACV – payback period http://techcrunch.com/2015/08/28/the-math-behind-saas-startup-valuation/
Many investors do like seeing both, however: the blended number as well as the CAC, broken out by paid/unpaid. We also like seeing the breakdown by dollars of paid customer acquisition channels: for example, how much does a paying customer cost if they were acquired via Facebook?
paid CAC [total acquisition cost/ new customers acquired through paid marketing] it informs whether a company can scale up its user acquisition budget profitably CAC per channel Counterintuitively, it turns out that costs typically go up as you try and reach a larger audience. So it might cost you $1 to acquire your first 1,000 users, $2 to acquire your next 10,000, and $5 to $10 to acquire your next 100,000. That’s why you can’t afford to ignore the metrics about volume of users acquired via each channel.
Difficult to map transactions to advertising/marketing spends. unless you have dedicated marketing software
These are backwards-looking metrics. They tell you what your LTV or CAC was for a prior time period, but not what it’s shaping up to be, which is key for actionability.
Unit – the part of product that people use most
Yes… a longer sales cycle sometimes adds to the typical CAC calculation; but not always. Sometimes the costs are the same, but if we can shorten it, the *efficiency* of the CAC drastically improves. Oh, and I won’t even go into the fact that if you can shorten your pay pack period and increase ACV, you could actually increase the amount you can spend for a customer and grow faster than your competitors, outbid them on AdWords, outspend them in other channels, steal their top sales people, etc.
t turns out that we are actually interested in two CAC numbers. One that looks purely at marketing program costs, and one that also takes into consideration the people and other expenses associated with running the sales and marketing organization. The first of these gives us an idea of how well we could do if we have a low touch, or touchless sales model, where the human costs won’t rise dramatically over time as we grow the lead flow. The second number is more important for sales models that require more human touch to close the deal. In those situations the human costs will contribute greatly to CAC, and need to be taken into consideration to understand the true micro-economics.
First month churn is directly related to product – the most valuable feature Stability usually depends on product breadth, depth, customer service and pricing
GOAL of UNIT ECONOMICS
You think you have product market fit. Would scaling make sense?
Can you know real-time whether you will make a profit? Say per day? Or per
What levers do I know about for improving profitability? What have I already
used? What have I still ignored?
All are loaded statements!!
Survey: Stage of company?
Survey: Comfort with Excel? How many have used templates off the web or
created their own? How easy were the templates to tweak?
Survey: How many are comfortable with math?
THE NEVERENDING VC CYCLE
Invest ->scale->invest more-> scale more->LOSS!!!
Keep expanding with the assumption that eventually
They will stick with you
You can charge them higher
Therefore, profitability will rise at an exponential level
because of volumes, which will give the investor the
Formula for Unit Economics – for
LTV = (MRR– COR) x Customer Life Time
Customer Life time = 1/churn
MRR = monthly recurring revenue
COR = Cost of revenue, Direct costs
Churn = lost customers/prior month
CAC = All marketing and sales costs/all customers acquired
Critical First Steps and Tracking
Payback period = CAC/Avg MRR x Gross margin %
Benchmark LTV/CAC for your sector
Fix your duration first. Monthly, weekly, daily?
Build out your historical data next. Average
revenue per customer.
Calculate your retention rate. From here on,
it’s much easier.
NOW TRACK WITH
Problems – LTV calculations
Difficult to map transactions to
You need at least 6-12
months of data with a
reasonably large set of
customers in order to
predict life time value.
These are backwards-looking
What if you are not scaling, but only assessing product market
Assuming no marketing – calculate organic CAC.
Calculate number of transactions per customer.
This is good enough for now.
MRR (Pricing, Upsell,
Pricing – find the most valuable unit for your business model
Upsell – find the second most valuable unit for your business
Cross sell – find things that people usually buy in tandem
Retention rate -> Features, non-core, bells and whistles
Should you reduce the CAC? Or make it more efficient? – increase ACV,
reduce payback, then can increase CAC, rather than decrease it.
Sales Cycle -> Which is better - Longer or shorter?
Understand CAC better – Organic, Paid, Blended.
Fix the product
Understand product usage patterns
Correlate features with stickiness
Segment customers to understand churn
By product line
By marketing channel
Understand Cohorts (2 variables)
Measure customer satisfaction – Surveys (NPS)
THE REAL KICKER – CAC TO CASH
Months to recover CAC + number of months of growth*operating costs
= Funds requirement for cash flow profitability
Negative unit economics means the more you scale, the more loss you
have. Which is not good.
Unit economics in terms of CAC and LTV mostly associated with (paid)
marketing, which the VCs love to see as a proof of whether you will scale
well with the money they give you.
Be prepared to answer questions about the levers in the formula you use
for calculating unit economics.
KNOW THE RELATION BETWEEN UNIT ECONOMICS AND CASH FLOWS.
In the business of turning cash flow into business metrics!
The holy grail - http://www.forentrepreneurs.com/saas-metrics/
LTV - http://a16z.com/2015/08/21/16-metrics/
levers of LTV-http://abovethecrowd.com/2012/09/04/the-dangerous-seduction-of-the-lifetime-value-ltv-
Burn rate - http://avc.com/2011/12/burn-rate/
Uber's unit economics in india - http://www.graphguy.com/2015/10/ubers-economics-in-india-via.html
CPA, CPC calcuations -https://segment.com/blog/calculating-customer-acquisition-costs/
fully loaded unit economics - http://www.cleverism.com/ultimate-guide-unit-economics/
fully generated income statement - http://www.saas-capital.com/blog/saas-income-statement/
Raghav Bahl - http://thenetwortheffect.com/
Calculation (Excel) - http://www.slideshare.net/frippery/a-step-bystep-guide-to-calculating-customer-
Best cohort analysis - http://andrewchen.co/the-easiest-spreadsheet-for-churn-mrr-and-cohort-analysis-