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Unit Economics – How to Calculate for Early Stage Startups

A startup is only as good as its unit economics. However, the importance of this concept has been largely ignored in Silicon Valley for many years and it’s time to change that by focusing on how a company can maximize customer acquisition while minimizing conversion rates.
May 7, 2021

A startup is only as good as its unit economics. However, the importance of this concept has been largely ignored in Silicon Valley for many years and it’s time to change that by focusing on how a company can maximize customer acquisition while minimizing conversion rates.

A business will be able to grow rapidly if they have an effective strategy for acquiring customers at low expense but also high satisfaction levels – which begs the question: what are Unit Economics? They pertain specifically to monthly recurring revenue (MRR) divided into cost-to-acquire each new subscriber or client/customer multiplied by their lifetime value over one month–the result being expressed either in dollars ($), percentage (%) or both (%).

Your company’s ability to make data-driven decisions is imperative when it comes to survival in today’s competitive market. That said, take a unit economics approach and you will not only be able help steer your company into the right direction but also ensure that all aspects of your SaaS are driving profit and growth!

A good way for any startup looking to make their decision making process more powerful would be by adopting an economic analysis perspective – this helps businesses understand where they stand financially before moving forward with other ventures or investments.

What are unit economics?

what are unit economics

Have you ever wondered how to measure the success of your business? There are so many different strategies, and a never ending list of key metrics. As an owner for early stage startup company, it can be overwhelming!

Unit economics are a vital consideration for startups to take into account when looking at growth initiatives. They enable you to make projections around how fast your business can grow and the profitability of it, which makes early stage analysis much easier than it would be otherwise.

Unit economics in SaaS startups

When it comes to unit economics, there are two ways you can approach the problem from — looking at how much revenue your customer brings in (LTV) versus their cost of acquisition. The other way is evaluating if they have recouped CAC by calculating a payback period on that investment which will tell us when we turn profitable and should be able to expand our business accordingly!

For example – if you’re making $500 every month on average and your monthly client fee to access all features is only about $10 then that means you have an excellent 3:1 ratio! This may not be possible with larger enterprises so it should really just act as more anecdotal feedback rather than something necessarily worth aiming for but generally speaking this type of information can help inform decisions around pricing tiers, conversion rates etc.

Payback period on CAC

Еhis takes into account the time a company needs to pay back the cost of acquiring a customer, which is typically 1-2 years for most companies based on gross margin. Shorter payback periods are advantageous as less working capital is needed and this gives companies more room to grow faster without worrying about cash flow issues.

Unit economics - the most important metric for early stage startups

Your startup is a business, and you need to track the unit economics of your company. If this means accounting for product cost or margin per sale, it will be worth it in the long run because if not done now then when?

Your early stage startup should start tracking its financials – specifically earnings before taxes (EBT). This information can give insights into whether or not customers are buying enough products; how much they’re paying on average; what price range has been most successful so far.

Understanding your margins early is important because it will help you forecast revenue growth in the long term and ensure profitability, which are essential for any new business just starting out.

Regularly evaluate direct revenue and costs

Analyzing your direct revenues and costs regularly is an important part of understanding how well a business is performing. For startups, it helps identify opportunities for growth while also dealing with the challenges that come from scaling too quickly.

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