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Unit Economics and Cash flows


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Unit economics explained from a cash flow perspective. The presentation uses some structure with already available expert commentary on the web to indicate a sense of profitability.

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Unit Economics and Cash flows

  2. 2. QUIZ  Let’s understand the basic metric for:  Ola/Uber  Zomato/Foodpanda  FreshMenu
  3. 3. 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 week?  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?
  4. 4. 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 required exit
  5. 5. Formula for Unit Economics – for Scaling LTV = (MRR– COR) x Customer Life Time  Customer Life time = 1/churn  MRR = monthly recurring revenue  COR = Cost of revenue, Direct costs (variable)  Churn = lost customers/prior month total CAC = All marketing and sales costs/all customers acquired
  6. 6. 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 COMPETITION!
  7. 7. Problems – LTV calculations Difficult to map transactions to advertising/marketing spends. 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 metrics.
  8. 8. But wait!  What if you are not scaling, but only assessing product market fit?  Assuming no marketing – calculate organic CAC.  Calculate number of transactions per customer.  This is good enough for now.
  9. 9. LTV levers  MRR (Pricing, Upsell, cross-sell)  Product mix  Channels  Sales capacity SEGMENTATION!!  Pricing – find the most valuable unit for your business model  Upsell – find the second most valuable unit for your business model  Cross sell – find things that people usually buy in tandem
  10. 10. CAC Levers  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?  Upselling (ACV)  Understand CAC better – Organic, Paid, Blended.
  11. 11. Churn Levers  Fix the product  Understand product usage patterns  Correlate features with stickiness  Segment customers to understand churn  By product line  By persona  By marketing channel  Understand Cohorts (2 variables)  Reduce Growth!!  Measure customer satisfaction – Surveys (NPS)
  12. 12. THE REAL KICKER – CAC TO CASH FLOW Months to recover CAC + number of months of growth*operating costs = Funds requirement for cash flow profitability
  13. 13. Key Takeaways  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.
  14. 14. THANK YOU! Email: In the business of turning cash flow into business metrics!
  15. 15. References  The holy grail -  LTV -  levers of LTV- formula/  Burn rate -  Uber's unit economics in india -  CPA, CPC calcuations -  fully loaded unit economics -  fully generated income statement -  Raghav Bahl -  Calculation (Excel) - lifetime-value?related=1  Best cohort analysis - guest-post/