Today we will talk about young companies' economy, to be more precise, economy per one user. Unit economics is a profit or loss calculations per one customer.
In fact, it is an answer to the following questions: does the company has a financial sense? Are there any reasons for company's scaling? What is the company's breakeven point?
According to unit economics concept earnings are represented as revenue earned on average per one customer. Expenses can be calculated as variable costs, which are required to fulfill one's sales order. Fixed costs are not taken into account. The rest steps are simple: you need to subtract variable costs from the profit and, in case of luck, receive a profit.
Now let's consider coefficients that allow us to understand the effectiveness of this model in more details:
- CAC (Customer Acquisition Cost) or CPA (Cost Per Acquisition) is a price for attracting one customer, which generates money for the company.
For example, if the company's budget for clients' attraction is ₽ 200'000 and it engaged 400 new customers, then CAC will be equal to ₽ 500. It should be considered that company has different attraction channels and CAC for them will vary. Of course, it is better to use the one channels, that will cost less.
- CAC payback is a time period essential for covering client attraction cost.
- ARPU (Average Revenue per User) is an average revenue per one attracted customer.
- LTV (Life Time Value) is a coefficient that shows how much revenue one client earns for you during a time period of using your product.
If, for instance, customer has been using your service for 3 years already and each month he/she has been paying ₽ 350, while you were spending ₽ 100 on him/her, then LTV is the following:
3 mnth * 12 * (₽ 350 — ₽ 100) = ₽ 9'000
It means that this particular client will generate for you ₽ 9'000 for 3 years.
- COGS (Cost of Goods Sold) represents variable costs.
Why is it significant to make these calculations? First things first, you need to understand that blindfold work is a huge foolishness. Moreover, the calculation of the model takes only a short time but it will give you a tangible benefit. It should be noted that before scaling your business, figure out its economy and afterwards try to scale exactly the profit.