Easy guide to calculating Unit Economics
Unit economics are considered as the foundational blocks of the business, however most of the business owners do not know what this term means. In today’s post, we are going to talk about what the unit economics are &tell you how to use it to expand your business understanding. This newfound method to look at the business can allow you make informed decisions as well as increase the profitability.
Basicsof the unit economics
UE or Unit economics will help you understand if you’re getting good value from your customer to warrant its costs you’re spending on getting &retaining them or creating and servicing the product. The unit economics analysis can help you project how much profitable the company might be, know when it will reach profitability as well as distinguish various strategies that can work right to influence it. Most of the startups may start with the inefficient and negative unit economics as well as take some years to get profitable unit economics.
For the start-up to attain this point, changes can be made to the combination of various factors, like reaching the critical range of customers, decreasing cost of acquiring the customers and reducing cost of producing its product.
An average amount of the money you make per customer over lifetime of the relationship with you. And in SaaS, it is an amount of money that you will make from time they actually sign up and time they cancel & do not return. Calculating the LTV rightly will tell you so much about the business.
CAC or Customer acquisition cost
The amount of money that you spend on the sales &marketing to get the customer is CAC. Suppose you spend very little, you do not get the customers. Suppose you spend very much, you do not get any profit. So, the right amount is directly tied to LTV, thus calculating &understanding the CAC is very important for your business.
Gainingunderstanding of the unit economics,
The main points of the business’ financial model can make sense;
Management may have the simple time to determine break-even points as well as contribution margins, which will help in the decision-making;
Calculation of ROI &other profitability tests
Forecasting and predicting future profitability of company can be simpler.
How Can You Analyze Cost of Acquiring the New Customers?
Each new business encounters hurdle of getting new customers. And cost of acquisition is the essential metric for the companies who are looking to decide how much they spend to get the new customer. And here the formula is:
CAC equals to (sales &marketing costs or number of the acquired customers)
And LTV to CAC approximation will help you to decide if the blocks of the marketing attempts are strong or want to get adjusted. Suppose your CAC is very less than LTV, this indicates your business is very strong. Suppose two metrics are totally equal, it highlights the stagnant business. Suppose your CAC appears greater than the LTV, then you’re looking at the financial loss.