Unit economics are essentially a set of metrics and calculations by which companies can evaluate their business model. Thanks to this, it is possible to project how profitable the company may be, or not, and when it can expect to reach profitability.
Unit Economics Optimisation
Unit Economics for Startups
Unit economics are especially important for startups, as startups often to pay close attention to metrics such as average customer acquisition cost and their profitability, to ensure that they do not run out of money! According to a poll of startup founders conducted by CB Insights, 66% of startups have 12 months or less of cash left.
Similarly, when startups are looking for investment, these unit economics metrics are part of the criteria by which these investors assess the startup. Therefore it’s crucial for startups, and any other business looking to grow sustainably, to have a solid understanding of the unit economics of their business, and the various initiatives they can undertake to try to shift any of them in the required direction.
Unit Economic Metrics
Cost Per Acquisition (CPA)
The average cost spend required to acquire a single customer
Lifetime Value (LTV)
The total expected revenue that a business will receive from one customer over the course of their customer lifecycle.
Average Order Value (AOV)
The average amount of money spent each time a customer places an order. Average Order Value is related to Basket Size, a metric measuring the average number of items placed in a customer’s basket.
Purchase Frequency (PF)
The average number of times a customer buys from your business.
Calculating your Unit Economics Metrics
To calculate your Cost Per Acquisition over a certain time period, you need to divide your total marketing spend by the number of customers you have acquired.
How to use your Unit Economics data?
Once you’ve established your Cost Per Acquisition, Average Order Value, and Purchase Frequency, you can start looking at which of these metrics you can shift in order to achieve profitability (i.e. where your customer Lifetime Value is greater than your Cost Per Acquisition).
Consequently, you can ensure that everyone’s goals across your business are aligned as needed, whether that’s increasing Purchase Frequency, trying to push up Average Order Value, or focusing on building content for organic search, to lower your Cost Per Acquisition.
In fact, the role that organic search plays in stabilising customer acquisition costs is one of the many reasons that SEO is so crucial for businesses, and yet it’s all too often an afterthought. To see how Optiminder can help your business with your organic search needs, visit our SEO Services.
So, should You always be aiming
Hold on! Profitability is important, but it isn’t the be all and end all for your business. In fact, depending on the stage that your business is at, profitability might not even be desirable! Of course, you’ll eventually need your business to be profitable, but many businesses go years without even attempting to achieve profitability, and that’s okay.
In fact, being ‘unprofitable’ may be the necessary for achieving the growth required to make a dent in the market. Famously, it took Amazon a whole 9 years to make a profit, and there’s still some debate over its profitability today!
Nevertheless, you still need to be closely familiar with these metrics, and understand how they vary from channel to channel within your business’s performance. This is how you’ll infer which activities are working, where to increase your spend, where to cut back, and where you need to test out new initiatives.
How we can help?
If you’d like a hand measuring your customer lifetime value, customer acquisition cost, profitability, or any of the other unit economics KPIs mentioned here, Optiminder’s here to help.
Similarly, we can analyse your various marketing activities to work out which are the most effective in driving your core business KPIs, whether that’s growth, profitability, retention, or any of the other metrics we’ve talked about today.
Whatever your budget, Optiminder can help you test out and optimise new strategies, and get a detailed picture of your marketing efforts and your customer base. Reach out today to find out how we can help you build a sustainable and profitable business.