TRC 013: Understand and visualise your unit economics with our calculator
Jul 06, 2023Read time: 4 mins
Unit economics are an important measure of business strength in any market.
In a market where capital is scarce and having an understanding of how you might reach profitability is key to have at hand, they are crucial.
Recently we have talked to a lot of founders who are struggling to understand how their unit economics might work.
They often want help with modelling different outcomes.
To help out, we have created an easy to use calculator in Google Sheets that makes it easy to model different scenarios before you start, or if you already have some traction.
It can help you with the following metrics:
- Total Contribution Margin Lifetime Value (Total CM LTV)
- Total CM LTV less Customer Acquisition Cost (CAC)
- CM LTV / CAC Ratio
- CAC Payback Period (months)
Total Contribution Margin Lifetime Value (Total CM LTV)
This metric measures the total profit a company makes from a customer during their lifespan.
It is calculated by multiplying the average contribution margin per customer by the average lifespan of a customer.
This figure helps you gauge the long-term financial value of acquiring new customers.
Total CM LTV less Customer Acquisition Cost (CAC)
Subtracting the CAC from the Total CM LTV provides insight into the net value each customer brings to your startup over their lifetime.
By visualising this data, you can make data-driven decisions regarding budget allocation for customer acquisition and retention.
CM LTV / CAC Ratio
This ratio shows the value of a customer in comparison to the cost of acquiring them.
A ratio greater than 1 suggests that the customer is profitable, and the higher the number, the more profitable the customer.
It's an excellent measure of the cost-effectiveness of your marketing efforts.
If you never payback your acquisition cost, you will never be profitable.
CAC Payback Period (months)
The CAC Payback Period indicates how long it takes for your company to recover the acquisition cost from a customer.
This is crucial in understanding your startup's cash flow and planning your expansion strategies.
The longer it takes to pay back, the more capital you will need to fund the period to unitary profitability.
You can access the Google Sheets tool here.
Remember, understanding your financial metrics is not just about keeping track of numbers.
It's about using these insights to grow your business strategically and sustainably.
Let us know if there are any other calculations you’d like to see in the tool, or other metrics you are struggling with.
We hope you find this useful.
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