In God I Trust... All Others? Must Have Unit Economics
Remember our discussion on blood type? You know, your business finances.
Understanding and monitoring your business finances is a vital practice needed for success-but, there's more to that discussion than just net profit and losses. When we take a deeper dive into the world of financial metrics, we come across a term known as unit economics. Talk to me about your Units?
Unit economics are the direct revenues and costs in a business model expressed on a per unit basis. For most consumer based companies, a "unit" will be a customer. And the most important unit economics to consider are: Cost of Goods (COGS) - what does it cost you to make your product? Customer Acquisition Cost (CAC) - essentially how much does it cost to acquire this customer? Lifetime Customer Value (LTV) - or the amount of revenue a single customer creates during the entire duration of their usage of your service and/or product.
The equation is simple. We need LTV to exceed the sum of CAC and COGS in order to have a successful business. So it's important to identify and iterate upon the levers that impact those unit economics, and find ways to create advantages in your model that shift them in your favor.
Increasing Lifetime Value Apple is brilliant at creating lifetime customer value.
They introduce new products. The Iphone, Ipad, MacBook, AppleTV. Lines of products, just waiting for us to buy them. And, they modify old products. You ever wonder why there's a new Iphone every summer? Apple is a LTV creating machine.
Can't be that innovative with new products? Another way they increase LTV? Customer retention. You're a "mac" person. Which means two things. You probably have multiple Apple products and you'll probably never buy another brand of (phone, computer, mp3 player) again.
In your business, ask yourself how you can increase the lifetime value of your customers through new product innovation and building customer loyalty.
Decreasing Customer Acquisition Cost Customer Acquisition Cost, or CAC, can be optimized by improving the effectiveness and efficiency of your marketing. Advertising can be expensive. Implementing useful, cost efficient ways to get the word out about your product is vital to dropping CAC.
Some standard customer acquisition strategies include, coupons, freebies, and giveaways. Be responsible with these, as free "stuff" can quickly negatively impact your bottom line. But, I'll always encourage folks to think outside of the box. Get creative! Consumers, now more than ever or looking for authentic ways brands speak to them. There is a restaurant in the Washington D.C. area that provides complementary bicycle seat covers, whenever it rains, for bikes parked in their area. It's essentially a two cent shower cap that's been branded - but, makes a huge impression with folks. You're letting them know you care about them, and literally turning a rainy day into a positive customer experience. Social media is a great tool to help spread the word. Try the old, follow back strategy. When a customer follows you on Twitter or Instagram, follow them back and engage with them. When they follow you, try shooting them a free offer via direct message - It costs you nothing (aside from the offer) and shows a customer you’re interested in what they have to say and who they are. Encourage them to refer their friends to your business for additional incentives and repeat the cycle of acquisition when their friends sign up!
Decreasing Cost of Goods Typically, at scale (as your business grows) you should be able to make your product, cheaper. Not because you are using cheaper ingredients or resources, but, because you can purchase those resources or ingredients in bulk. Certainly, in the food industry this is true. You will get a more competitive price for an order of 1,000lbs of chicken breast compared to 10lbs. You should have constant dialogue with your manufacturers and providers. Honestly, weekly touch bases where you can ask for more competitive pricing based on the growth you are seeing and perhaps even expecting should be a common practice with your vendors. Take advantage of this. They want you to grow! And they want you to stay with them as you grow - don't forget that when negotiating bulk pricing. A healthy business will net out positive for the unit economic equation: LTV - (COGS + CAC) = ?
Questions? Shoot me a quick note and we can talk about your units. #scratchmade #scrathmadetips #leader #ceo #motivation #motivator #entrepreneur #technopreneur#leadership#startup #smallbiz #smallbusiness #smallbusinesssales #dreams #hustle #passion #mentoring#coaching#inspire #ambition #beyourownboss #businesspassion #business
