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
