Customer Unit Economics & Financials
Taught a workshop yesterday on customer unit economics and startup financial models. It will be hard to capture without the discussion and example models, but just to make it available (since I haven’t found great resources for these topics elsewhere), I thought I’d share.
To summarize: Customer Unit Economics is a vital exercise (and essential metric to constantly track) to figure out what a customer is worth to your business. It is decomposed into Customer Acquisition Cost (CAC) or “how much does it cost to get a customer” and Lifetime Value (LTV) or “how much is that customer worth to me [over some reasonable amount of time].”
We discussed how to calculate CAC based on how you acquire customers, making sure you are tracking by channel (source). The biggest points of confusion were what to include (this is tough and customized to your business). Direct costs are simple (BoM, Sales, etc.), but are you having to do extra engineering customization? Are you training the customer? …
LTV clearly depends on how you monetize users. Then, most interesting for me, is the link between the two (LTV vs. CAC) and how you know if you’ve built a real business, and what you should be willing to pay for new customers based on where they enter the funnel. I encourage people to take a decent (reasonable stab) on LTV and work backwards to a target CAC.
For the second half, we reviewed basic startup financial models. This one is harder to summarize, since a lot was done with an example spreadsheet, but suffice it to say:
- Don’t worry about traditional “financials” (Balance Sheet, Income Statement, Cash Flows) since they are basically worthless to a startup
- Focus on your Revenue projections. What are the assumptions you have to believe to make the business big enough & interesting? Make the assumptions very clear. Do you believe them? What if you are off by half, etc.?
- Build in calculations to key metrics that summarize the health of your business and be obsessive about putting in actuals every month as a reality check.
- Layer in some basic costs, focusing on the few items that will be significant.
- Have a summary tab that give the overview of both by year.