RUS

19 March 2018

JetStyle Digest: All you need to know about unit economics

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With just a couple of days until our free webinar on unit economics, we prepared a new JetStyle Digest for you. 

This time we will provide you with all the information you need to know about unit economics to get ready for the webinar. Why do unit economics matter? Why do startups fail? How to think through your business? How to price your products? And how to estimate your unit economics before you have any customers? Find out in our new blog post!

 

 

Basics of Unit Economics

The number 1 reason startups fail is they can’t find product market fit prior to running out of money. This is pretty widely known across the industry. However, what a number of people don’t seem to know is the second largest reason startups fail is their unit economics don’t work out to be profitable enough. What I mean is their cost of acquisition + costs combined is larger than their lifetime value of their customer. Therefore tracking unit economics early allows you to see what you have coming down the road and accurately predict revenue and run rate.

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Why Do ‘Unit Economics’ Matter?

In one of his 2016 blog posts, Hotels.ng’s Founder, Mark Essien pointed out how important it is for every start-up founder to watch its cash in the current business environment by taking 7days to study and understanding the Unit Economics of their business.

Using unit economics, you will be able to pinpoint your cash flow over any financial operating period. In fact, you can use the data as a basis for your short-, medium- and long-term financial plans. 

Unit economics, at any point in time, can give you a reading on the state of your business engine. Is it time to step on the gas, coast, or tap the brakes? 

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How to think through your Business

This is a simple way to understand Unit Economics. As long as the customer gives you more money than what you spent on getting that customer you have a deal (LTV > CAC), if your CAC is higher than your LTV that’s death alert, you need to stop whatever you are doing and head for your war room and figure out a way to acquiring customers for cheaper or maybe charge customers more (this works if customers really want your product) or both.

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Customer lifetime value, how to model it, how to measure it

Customer Lifetime Value, commonly referred to as LTV, is a very important business metric that sits outside standard financial reporting. LTV, in essence, tries to show how much every customer will be worth to you over the course of their lifetime with your business. The use of the verb ‘try’ here is intentional as almost always LTV is an arithmetically modelled calculation and hence will usually not be 100% accurate.

LTV is important when coupled with another metric, customer acquisition cost (CAC). These two metrics sit on opposite sides of a theoretical see-saw and jostle against each other to determine the success of your business.

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Unit Economics: CLTV, CAC and Cohorts

How much is a customer worth? How much does it cost to acquire a customer? If you can’t answer these basic questions, it’s hard to know if your business is sustainable or not. Your unit economics analysis will help you answer these questions. 

Using unit economics analysis, you can estimate how much a customer is worth (CLTV) and how much they cost to acquire (CAC). If CLTV is significantly higher than CAC, the customer is worth much more than it costs to acquire and it probably makes sense to, for example, spend more money on marketing to acquire more customers.

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How to estimate your unit economics before you have any customers

All investors are very interested to see that you have a grip on your numbers and that your business will, fundamentally, make money on a per transaction basis. The ability to estimate your unit economics is an important step forward, even before you have any real customers. If you forecast to lose money on a per transaction basis, it’s likely you won’t get investment. Being able to demonstrate your unit economics also shows that you have enough knowledge of the associated costs of your business and this will, in turn, further your chances of gaining investment.

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How to Price Your Products

One of the secrets to business success is pricing your products properly. Price your products correctly and that can enhance how much you sell, creating the foundation for a business that will prosper. Get your pricing strategy wrong and you may create problems that your business may never be able to overcome.

"It's probably the toughest thing there is to do," says Charles Toftoy, associate professor of management science at George Washington University. "It's part art and part science.”

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SaaS Metrics 2.0 – A Guide to Measuring and Improving what Matters

SaaS/subscription businesses are more complex than traditional businesses. Traditional business metrics totally fail to capture the key factors that drive SaaS performance. In the SaaS world, there are a few key variables that make a big difference to future results. This post is aimed at helping SaaS executives understand which variables really matter, and how to measure them and act on the results.

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Uber Business Model – Insights into How Uber Works & Revenue Analysis

Major e-commerce marketplaces today such as Amazon, Flipkart and on-demand businesses such as Uber also seem like they are losing ground on their unit economics while over focusing on customer discounts and partner incentives. A business has to burn money initially while they are building the ground and establishing the brand, but the big question is how long can you continue discounting the business? This is a question that has no single answer. Let us try to look at whether the unit economics of Uber make sense or not.

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P.S.: Unit economics is the key approach in the work of our agency and we are happy to share our experience with you! Do you have any further questions on this subject or need help in calculating your business’s unit economics? Just drop us a line! We will be happy to assist.

 

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