5 ms·

Unit Economics

69 points by guyshachar 10y ago

sharemywin 10y ago
unit economics are tricky though. Brand, Channel mix, referrals, PR, endorsements, and more can all effect CAC. customer service and targeting can have a huge impact on LTV.
- guyshachar 10y ago
  You're right! It can get a little tricky... Still, if you're unit economics don't work, you're going to have a hard time building a company.Disruptive business models sometimes work (and history is always written in hindsight)... But basic economic principles always hold true
  - rgbrgb 10y ago
    The point is that unit economics are not some static thing, LTV is a product of conversion rates at each step of your funnel. Every step you improve by x% improves LTV by x% for new users (for this type of company at least).
    - sharemywin 10y ago
      Also, think of most small service businesses they hustle their ass off in the beginning with horrible CACs but then they start getting referrals and LTV/0 starts looking pretty good.
- oneloop 10y ago
  This comment contains more information than the article linked. I was reading the article and the whole time I was thinking that the author would eventually say something substantive about unit economics. But no.
mootothemax 10y ago
If your Lifetime Value is only "bigger" than your Customer Acquisition Cost, chances are you're still going to be operating at a loss. A healthy aim is an LTV of three times your CAC: LTV > (3 x CAC) That way - and remember that we're not talking hard figures here, just rough estimates - you're still aiming to cover your operating costs in addition to "just" gaining customers.
- ssharp 10y ago
  You have to have a grasp on your cash flows as well. LTV takes X years to be a fully realized revenue but CAC is an immediately realized expense. The fun businesses are the ones with CAC below immediately realized revenue. They can fund their own growth much faster.
- kareemm 10y ago
  That's true for subscription SaaS, but it's not necessarily true for other business models.
- sharemywin 10y ago
  But, a lot of business take years to figure out LTV. And investing in good customer service improving the product can all lead to a much better LTV. Also, there are many ways cut CAC in half possibly.
  - mistermann 10y ago
    I always ask myself this whenever it is asked on Dragon's Den....could someone explain how customer acquisition cost is calculated? The "common sense" approach I'd think is something like: (sales & marketing spend) / (customer count) ....but this would completely ignore whether the spend was efficient, so is there a more sophisticated way of calculating CAC?
    - sharemywin 10y ago
      if you can break out where your customers come from(which channel) you can get some idea of what the channel is contributing. but it even that's a little misleading because it's hard to get referrals if you don't have customers in the first place, so where do those get attributed to.
jasode 10y ago
I'm dismayed that twice, the titles have obscured what the essay is about. The article's title is "Dear Unit Economics, I hate you" which buries the lede, and then the (original) HN submitted title "The Most Terrifying Term in the Entrepreneurial Dictionary" is another distraction. The article doesn't explain any strategic thinking or tradeoffs around "unit economics". It's mostly about the "on-demand" startups that are trying the "Uber for X" model not making money. Yes, their unit economics are bad (so far) but the author doesn't make a distinction between strategically losing money on purpose to try and gain market share vs a fundamentally broken businesses models that loses money forever. Example of negative unit economics that turned out fine would be Paypal's $10 credit promotion for new account signups. They had negative unit economics from 1998 - 2002 Yes, the vast majority of on-demand startups will fail but they feel their unit economics will eventually become positive. A better analysis would explain why they will never become positive. (If the speculation on eventual W-2 employee status for all "contractors" is the main reason, well, I suppose you could have titled the article "W-2 threatens all on-demand startups") A lot of them are losing money now but we (and the VCs funding them) already know that.
- TaylorAlexander 10y ago
  My Kickstarter funded electronics company had negative unit economics too, just because I didn't know what I was doing. I had to bail myself out with loans, but it didn't kill me like this article suggests it would.
- ndonnellan 10y ago
  It would also be a better article (or good article at all) if it included actual examples of unit economics perhaps backed by data. I would love to see data showing that the majority of these companies are built on lies, but it's not here.
  - eridius 10y ago
    Agreed. I thought it was very strange that the article tries to imply that all on-demand startups beyond Uber are in trouble, when that's not actually the case. At least one, if not several, of the listed non-Uber companies are doing just fine.
onion2k 10y ago
Paying more money to get a premium service is not innovative in any kind of way. It’s just another luxury service for people who can afford it, and this concept has been around for quite a while now. Gig economy businesses that work are growing the market, not just taking a share of an existing market. Uber works fantastically because they're cheap enough and accessible enough that people who previously didn't often take a cab now can. That's on top of disrupting the taxi market. If a gig economy business is aiming to lower costs for existing customers then their business model is very wrong. They should be aiming to bring in vast numbers of new customers who don't use the luxury services already. That's where the money and growth lies.
- nine_k 10y ago
  Frankly, Uber's unit economy sucks so far, too.
- davemel37 10y ago
  Just to add to this, for me at least, It's more the car rental market than the taxi market that Uber disrupted.
spectrum1234 10y ago
This article is terrible. Author is clearly in over his head. The most important thing for startups is not unit economics but balancing resources for both product and marketing/growth. With a startup you tackle challenges from highest risk to lowest risk. This ignorant author is missing much higher risks and using observation bias to confirm his beliefs.
aelaguiz 10y ago
The whole article can be summarized by reading the last sentence: "some problems were just not meant to be solved." That's it. The author doesn't believe the on-demand economy can work. The rest is just lead up. I disagree with his assessment.
rororororo 10y ago
The article also misses the value of intangible assets and strategic options. Unit economics might be negative for now but who knows what a company might be doing in the future. Of course there might be wildly overvalued companies but may be negative unit economics can be seen as an investment in operational scale -- not diluting fixed costs but actually getting to scales where the economics change and new strategic options become viable. (Example: Uber moving from hailing to self-driving cars, obviously.)

69 points by guyshachar 10y ago

unit economics are tricky though. Brand, Channel mix, referrals, PR, endorsements, and more can all effect CAC. customer service and targeting can have a huge impact on LTV.

guyshachar 10y ago
You're right! It can get a little tricky... Still, if you're unit economics don't work, you're going to have a hard time building a company.Disruptive business models sometimes work (and history is always written in hindsight)... But basic economic principles always hold true
- rgbrgb 10y ago
  The point is that unit economics are not some static thing, LTV is a product of conversion rates at each step of your funnel. Every step you improve by x% improves LTV by x% for new users (for this type of company at least).
  - sharemywin 10y ago
    Also, think of most small service businesses they hustle their ass off in the beginning with horrible CACs but then they start getting referrals and LTV/0 starts looking pretty good.
oneloop 10y ago
This comment contains more information than the article linked. I was reading the article and the whole time I was thinking that the author would eventually say something substantive about unit economics. But no.

mootothemax 10y ago

If your Lifetime Value is only "bigger" than your Customer Acquisition Cost, chances are you're still going to be operating at a loss. A healthy aim is an LTV of three times your CAC: LTV > (3 x CAC) That way - and remember that we're not talking hard figures here, just rough estimates - you're still aiming to cover your operating costs in addition to "just" gaining customers.

ssharp 10y ago
You have to have a grasp on your cash flows as well. LTV takes X years to be a fully realized revenue but CAC is an immediately realized expense. The fun businesses are the ones with CAC below immediately realized revenue. They can fund their own growth much faster.
kareemm 10y ago
That's true for subscription SaaS, but it's not necessarily true for other business models.
sharemywin 10y ago
But, a lot of business take years to figure out LTV. And investing in good customer service improving the product can all lead to a much better LTV. Also, there are many ways cut CAC in half possibly.
- mistermann 10y ago
  I always ask myself this whenever it is asked on Dragon's Den....could someone explain how customer acquisition cost is calculated? The "common sense" approach I'd think is something like: (sales & marketing spend) / (customer count) ....but this would completely ignore whether the spend was efficient, so is there a more sophisticated way of calculating CAC?
  - sharemywin 10y ago
    if you can break out where your customers come from(which channel) you can get some idea of what the channel is contributing. but it even that's a little misleading because it's hard to get referrals if you don't have customers in the first place, so where do those get attributed to.

jasode 10y ago

I'm dismayed that twice, the titles have obscured what the essay is about. The article's title is "Dear Unit Economics, I hate you" which buries the lede, and then the (original) HN submitted title "The Most Terrifying Term in the Entrepreneurial Dictionary" is another distraction. The article doesn't explain any strategic thinking or tradeoffs around "unit economics". It's mostly about the "on-demand" startups that are trying the "Uber for X" model not making money. Yes, their unit economics are bad (so far) but the author doesn't make a distinction between strategically losing money on purpose to try and gain market share vs a fundamentally broken businesses models that loses money forever. Example of negative unit economics that turned out fine would be Paypal's $10 credit promotion for new account signups. They had negative unit economics from 1998 - 2002 Yes, the vast majority of on-demand startups will fail but they feel their unit economics will eventually become positive. A better analysis would explain why they will never become positive. (If the speculation on eventual W-2 employee status for all "contractors" is the main reason, well, I suppose you could have titled the article "W-2 threatens all on-demand startups") A lot of them are losing money now but we (and the VCs funding them) already know that.

TaylorAlexander 10y ago
My Kickstarter funded electronics company had negative unit economics too, just because I didn't know what I was doing. I had to bail myself out with loans, but it didn't kill me like this article suggests it would.
ndonnellan 10y ago
It would also be a better article (or good article at all) if it included actual examples of unit economics perhaps backed by data. I would love to see data showing that the majority of these companies are built on lies, but it's not here.
- eridius 10y ago
  Agreed. I thought it was very strange that the article tries to imply that all on-demand startups beyond Uber are in trouble, when that's not actually the case. At least one, if not several, of the listed non-Uber companies are doing just fine.

onion2k 10y ago

Paying more money to get a premium service is not innovative in any kind of way. It’s just another luxury service for people who can afford it, and this concept has been around for quite a while now. Gig economy businesses that work are growing the market, not just taking a share of an existing market. Uber works fantastically because they're cheap enough and accessible enough that people who previously didn't often take a cab now can. That's on top of disrupting the taxi market. If a gig economy business is aiming to lower costs for existing customers then their business model is very wrong. They should be aiming to bring in vast numbers of new customers who don't use the luxury services already. That's where the money and growth lies.

nine_k 10y ago
Frankly, Uber's unit economy sucks so far, too.
davemel37 10y ago
Just to add to this, for me at least, It's more the car rental market than the taxi market that Uber disrupted.

spectrum1234 10y ago

This article is terrible. Author is clearly in over his head. The most important thing for startups is not unit economics but balancing resources for both product and marketing/growth. With a startup you tackle challenges from highest risk to lowest risk. This ignorant author is missing much higher risks and using observation bias to confirm his beliefs.

aelaguiz 10y ago

The whole article can be summarized by reading the last sentence: "some problems were just not meant to be solved." That's it. The author doesn't believe the on-demand economy can work. The rest is just lead up. I disagree with his assessment.

rororororo 10y ago

The article also misses the value of intangible assets and strategic options. Unit economics might be negative for now but who knows what a company might be doing in the future. Of course there might be wildly overvalued companies but may be negative unit economics can be seen as an investment in operational scale -- not diluting fixed costs but actually getting to scales where the economics change and new strategic options become viable. (Example: Uber moving from hailing to self-driving cars, obviously.)