AIA2018 - Rick Rasmussen - Startup Financials
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This document discusses unit economics, which is the fundamental building block of any financial model. It examines unit revenue, unit costs, and fixed costs. Key aspects of unit economics include understanding the cost to produce and sell one unit, the unit profit calculated as unit price minus unit cost, and using unit sales to calculate gross profit. The document also discusses differentiating between variable costs that can be attributed to a specific unit, and fixed costs that remain constant regardless of units sold.
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AIA2018 - Rick Rasmussen - Startup Financials
- 1. UNIT ECONOMICS © 2017 Rick Rasmussen
- 2. UNIT ECONOMICS Fundamental building block of any financial model Unit Revenue Unit Costs Fixed Costs (overhead)
- 3. MODULE OBJECTIVES Revenues minus Costs equals Gross Profit Fundamental building block of any financial model Unit Revenue Unit Costs Fixed Costs (overhead)
- 4. MODULE OBJECTIVES Gross Profit minus Expenses equals Net Profit Revenues minus Costs equals Gross Profit Fundamental building block of any financial model Unit Revenue Unit Costs Fixed Costs (overhead)
- 5. WHAT ARE UNIT ECONOMICS? A microscopic view into the transactions that make up your business Understanding the basics of what it costs to produce and sell one unit of goods One pizza One job done One client serviced One clicker delivered
- 6. REVENUE MODELS DRIVE UNIT ECONOMICS Type Business Revenue Model Example Primary Product Sales One time sale Presentation Clicker Service Sales Hourly Rate Consultant Trade Upcharge Retail Sales Derivative Subscription Monthly Revenue Software as a Service Marketplace Transaction Fees Ebay, Etsy Brokerage Commission Fees Real Estate Ecosystem Combination Apple
- 7. Example: Product Sales Behold the lowly clicker
- 8. Getting into the Clicker business What type of business? Existing? Re-segmented? New?
- 9. Getting into the Clicker business What’s the TAM?
- 10. Retail price: $35 Channel Margin: $19 Wholesale price $16
- 11. Retail price: $35 Channel Margin: $19 Wholesale price $16 You typically don’t control this… Revenue that comes to the company
- 12. UNIT ECONOMICS 1. Unit Price à $16 2. Each unit has a Cost This is your variable cost Also called COGS for Cost Of Goods Sold
- 13. 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?
- 14. UNIT PROFIT This is the profit you make per unit sold Unit Price minus Unit Cost UNIT PROFIT
- 15. UNIT PROFIT This is the profit you make per unit sold Average Selling Price (ASP): $16.00 Average Unit Cost: - $7.00 Unit Profit: $9.00 Unit profit is often called unit margin Unit Price minus Unit Cost UNIT PROFIT
- 16. 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
- 17. GROSS PROFIT Assume we’ve sold 100K units… Gross Revenue: $1,600K (same as $1,600,000) COGS: - $700K Gross Profit: $900K Notes: 1. US uses period as a decimal point 2. Larger numbers always expressed as $K ($1000) or $M ($1000K)
- 18. UNITS SOLD à GROSS PROFIT Units Sold (K) 100K Average Selling Price (ASP) $16 Gross Revenue ($K) $1,600 Average Cost $7 COGS ($K) $700 Gross Profit ($K) $900 Step 1
- 20. FIXED COSTS Generally includes: Rent, Insurance and Utilities Salaries Marketing Other (Interest payments All stay the same whether you sell one or 1M units
- 21. DO YOU HAVE FIXED COSTS? If you have a physical building, you probably pay Rent, Insurance, Utilities If you have employees, you have Salary costs If you promote, add Marketing and Sales as a primary expense * Exception to both would be large factories where Capital cost considerations need to be added
- 22. SALARIES How many people needed to run the business? Management Engineers Marketing, Sales, etc.
- 23. MARKETING Expenses relating to promotion and selling Can be significant for B2C and B2B2C companies Use 30% to 55% of revenues if you need to build a brand
- 24. TOTAL FIXED COSTS Add Salary, Marketing and Sales and other Fixed Expenses Category Expense Salaries $360K Marketing $370K Rent, etc $190K Total $K $920K
- 25. WHAT ABOUT OTHER COSTS? … It depends Yes: If we can attribute marketing costs on a per-unit basis Example is a coupon redeemed for a given unit This is a Unit Cost. No: If we are running a general campaign and cannot attribute to specific unit sales These are Fixed Costs
- 26. A UNIT COST EXAMPLE: COUPONS We run a coupon campaign for $2 off For every unit sold with a coupon - $2 is added to the cost of that good sold. We can attribute the coupon to the cost of selling that specific clicker This is a Variable or Unit Cost.
- 27. A FIXED COST EXAMPLE General Advertising We run radio ads, We attend trade shows Increases sales but can’t attribute our expenses to any specific unit sales. This is a Fixed Cost ?
- 28. VARIABLE VS. FIXED COSTS Variable Costs Direct Materials Direct Labor Fixed Costs Corporate Expenses Rent Salaries Insurance Training Research It Depends Shipping, Delivery Marketing Campaigns Sales Commissions Utilities Scrap Recalls
- 29. EXAMPLE: AMAZON AND AMAZON PRIME Standard Amazon Customer Pays Shipping on every item purchased Shipping expenses are known for each item These are Variable Costs These are Fixed Costs Amazon Prime Customer Pays $100/year membership and gets Free shipping Shipping expenses are not correlated for each item
- 30. EXAMPLE BUSINESS MODELS Product Business Retail Business Online Business SaaS Business B2B Direct Sales Franchise Model Licensing Model Consulting Sales Commissions B2B2C Donations Not-for-Profit Social Enterprise Two-sided-markets Everyone has different sets of fixed and variable costs
- 31. ALLOCATING FIXED COSTS For tech companies, normally summarized as: M&S Marketing & Sales R&D Research & Development G&A General & Administrative
- 32. ZONES OF REASON Once a company reaches “steady state”, you can compare expenses vs. industry norms. For tech companies, normally summarized as: M&S Marketing & Sales R&D Research & Development G&A General & Administrative Category Expense Marketing 20% to 55% R&D 10% to 30% G&A 8% to 15%
- 33. FINAL RESULTS Our Clicker Business…!!! Here is everything lined up for one period Are these good results? Results % Revenues $1,600 100.00% COGS $700 43.75% Net Revenue $900 56.75% Marketing $480 30.00% R&D $320 20.00% G&A $120 7.50% Total Fixed Costs $920 57.5% Net Profit ($20) -0.75%
- 34. NEXT… BUILDING A P&L Revenue minus COGS = Gross Profit Gross Profit minus Fixed Costs = Net Profit 1. Start with assumptions 2. Build a timeline 3. Unit economics used to derive gross profits 4. Add in fixed costs / expenses 5. Construct your P&L table Unit Economics Gross Profits Fixed Costs Full P&L