Startup Unit Economics

Jocelyn Ling . Oct 2014

1. intro

2. SaaS
3. serviceS/ product
4. Decision making

Understanding the economics of a business

Top Down:

Financial statements

Financial ratios

Bottom Up:

Unit Economics

What is your unit?

Product

Service

SaaS

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

Rate:

Months vs. Years

Amount: 

Customer vs. Dollars

Time: 

Cycles of Sales and marketing

type: 

Customer profile

Rate

At what rate am I acquiring my customers? 

  • Monthly
  • Quarterly
  • Annual

Example: www.quarterly.co vs. www.dropbox.com

Amount

Not all customers are created equal. Segment into: 

  • New
  • Returning
  • Free
  • Paying
  • Size 

 

time

How should your sale cycles match your offering cycles? 

type

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? 

Variables 

 

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

Retaining water:

Customer retention 

Rate:

How long?

Amount: 

expansion vs. shrinkage

Time: 

What is the length?

type: 

Counting what matters

Rate

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

Amount

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?) 

 

time

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?) 

type

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): 

Revenue in terms of users 

 

ARPU= Total Revenue / Number of users 

 

how much is leaking: churn

Rate:

what percentage

Amount: 

can you afford it?

Time: 

Specific times?

type: 

customers vs. dollars

1. acquisition
2. retention
3. churn

how do they relate to each other? 

CAC < LTV

Sustainable churn

 

 

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

Product

Services

SaaS

Output

  • Capital Expenditures

  • CAC
  • Marginal Operating Costs
  • Maintenance CapEx

Input

  • Revenue

  • Unit lifetime 

Product: economics of a single unit

= Contribution Margin

Example:

A look inside a single Chipotle store

Services: Economics of a Unit 

Or

3. Decision-making

How does this relate to growth?

understand your marketplace

Total Available Market (TAM)

Serviceable Available Market (SAM)

Serviceable Obtainable Market (SOM)

managing runway

Transactional

vs.

relationship

vs. 

ecosystem  

discussion:

Source: http://techcrunch.com/2014/03/24/a-look-inside-box-competition-product-plans-and-unit-economics/

"Not everything that can be counted counts, and not everything that counts can be counted." - Albert Einstein

thank you!

Jocelyn Ling. @j_ling

Startup Unit Economics

By Jocelyn Ling

Startup Unit Economics

  • 639
Loading comments...

More from Jocelyn Ling