Startup Unit Economics
Jocelyn Ling . Oct 2014
3. serviceS/ product
4. Decision making
Understanding the economics of a business
What is your unit?
1. Software as a service
Let's talk about leaky buckets
- Adding water
- Retaining water
- Measuring how much leaves
ways to add water: Customer acquisition
Months vs. Years
Customer vs. Dollars
Cycles of Sales and marketing
At what rate am I acquiring my customers?
Example: www.quarterly.co vs. www.dropbox.com
Not all customers are created equal. Segment into:
How should your sale cycles match your offering cycles?
Differentiate your type of customer:
- Acquisition vs. Maintainence
- Type of success (e.g., upselling, cross-selling)
Customer Acquisition Cost (CAC)
How much does it cost to get a paying customer?
Marketing Campaign: $2000
Unique views: 100
% of unique views that purchase your product: 25%
What is the cost per customer (CPC)?
How many conversions (new customers) did you get?
What is the CAC?
Exercise: Calculate CAC
expansion vs. shrinkage
What is the length?
Counting what matters
At what rate am I retaining my customers? How does this influence:
- Renewal options (e.g., opt-in vs. automatic)
- Cancellation options (e.g., future newsletters)
- Ease of customer experience in both processes
An relative over absolute perspective: How are customers staying relative to what they signed up for:
- Expansion vs. Shrinkage (e.g., did a customer sign up initially for a monthly contract and now renewed for an annual one?)
Length of renewed contract and the overall value of the customer (e.g., customer signs up for a annual contract after a pricing discount. How does that customer relate to others who paid the full price?)
Counting what matters:
- Number of customers vs. engagement of the product/ service (e.g., If you offer a monthly subscription, do you care about the up-sell/ cross-sell?)
Lifetime Value of the Customer (LTV):
How valuable is a customer?
LTV = Expected Life x ARPU x Gross Margin
Gross Margin = (Revenue - Cost of Goods Sold)/ Revenue
Average Revenue per User (ARPU):
ARPU= Total Revenue / Number of users
how much is leaking: churn
can you afford it?
customers vs. dollars
how do they relate to each other?
CAC < LTV
Potential standards to hold yourself up to:
LTV > 3x CAC
CAC < 12 months to recover
Lifetime Value of the Customer
Customer Acquisition Cost
Build out a customer tree to isolate problems
Break time! (10 mins)
2. Services/ Products
- Marginal Operating Costs
- Maintenance CapEx
Product: economics of a single unit
= Contribution Margin
A look inside a single Chipotle store
Services: Economics of a Unit
How does this relate to growth?
understand your marketplace
Total Available Market (TAM)
Serviceable Available Market (SAM)
Serviceable Obtainable Market (SOM)
"Not everything that can be counted counts, and not everything that counts can be counted." - Albert Einstein
Jocelyn Ling. @j_ling
Startup Unit Economics
By Jocelyn Ling