3.10. Unit-Economics

So, you have developed a product, you like it, you’ve launched it, the market seems to like it, but something doesn’t seem right. What’s the matter? The numbers don’t add up. The reason is that running a business is not about “likes” or “seems”, but about numbers.

What is Unit-Economics?

Unit-economics is the product account, an answer to a question of whether you are going to earn on your user (unit) or not. In order to understand that, you need to find out:

Why Do You Need Unit-Economics?

If your CAC (Customer Acquisition Cost) is higher than LTV (Lifetime Value) or, in other words, if you spend more money on user acquisition than you earn from one, then scaling such a business isn’t such a good idea and, as a matter of fact, doesn’t make sense at all. Sooner or later, you will simply run out of money and your business will cease to exist.

To understand what CAC is, let's say you get 100 customers, they cost you €10 000, which means that each customer costs you €100. Thus, if you once again spend €10 000, you will once again get 100 paid customers. What about LTV? LTV is how much you get from the customer, i.e., if, for example, your customers pay you €50 and stay with you, let's say, for 10 months, it means your LTV is 500 months.

It’s exactly for this reason that unit-economics is calculated — to understand whether it’s possible to develop a business, whether it can or cannot be scaled through some kind of a growth channel, and whether we need to increase LTV or decrease CAC.

So, how to Calculate Unit-Economics?

In order to calculate unit-economics and understand your future ways of acting, you need to compare the cost of acquiring a customer or group of customers and the revenue you get from that customer or group of customers. If you know the mentioned figures, congratulations! — you just calculated your unit-economics. So, if your:

What is Common Between CAC and LTV?

If you compare what CAC and LTV consist of and how they are build, you may notice that they have one common layer — that is activation. What is activation? Activation is one of the key layers of growth, because activation is exactly that main step when the user forms one’s opinion and attitude towards your product or service.

Activation makes CAC cheaper, because you do not attract customers who are not interested. If you "bought" 100 customers and only 50 went through activation, it means you actually interested only 50 real customers. But if you "bought" 100 customers and 75 went through activation, it means your CAC was lower, because you got more customers for the same amount of money. Of course, as you have more customers, your revenue increases.

Summing Up

You may like what you are doing, you may like how your products looks/smells/tastes like, you may be the biggest fan of your product, but if everything is only about 'you', then you're in trouble. You, first of all, should think about your potential or existing customers, take into account their preferences, likes and wants, because they are the ones who increase your numbers. And numbers do matter! If your customers like what they see/smell/taste, they get interested and become activated, buy your product and make LTV grow, which means they make you revenue grow and give you motivation for further expansion.