A Unit Economics Slide captures the cash economics of the core, relevant unit of your business. This is the unit which you ultimately will scale as you build the business. That unit is typically a customer: e.g. for a given customer, what’s the lifetime value? That unit, however, can be something else: a sale, a user, a sales rep, a market, an advertiser, etc. Start with the unit in terms of how you think about your business -- what’s the foundational unit that you are scaling in terms of how you are delivering value and making money.
A typical unit economics slide captures the cash investment upfront, and the cash earned over time for this unit. We want to capture this in one slide.
Given this you are typically showing these things in this slide (I will be using a Customer Model here. You can modify this to something besides a Customer if another unit is appropriate for you):
Customer Acquisition Cost : How much does it cost to acquire a customer?
Billings / Payments / Subscriptions : How do you receive cash from the customer?
COGS (Cost of Goods Sold) or BOM (Bill of Materials) : These are the direct costs associated with fulfilling the customer’s needs. Please note: sales and marketing should not be included in COGS or BOM. It goes in OpEx (Operating Expenses). VC’s are wary of businesses where COGS are more than 50% of your Payments -- and the lower the COGS the better.
Contribution : This is your Payments minus your COGS -- the cash gross margin you receive.
Churn Rate : The percent of customers lost or contraction month over month
Average Customer Lifetime = 1 / Churn Rate
Payback Period : This answers the question of how long it takes for your contribution to pay the Customer Acquisition Cost.
Lifetime Value = Contribution / Churn Rate or Contribution * Average Customer Lifetime
If there are any questions on calculating these, please read this.
Here’s an example of Hubspot’s Unique Economics:
Please draft your own unit economics table. If you like, you can make a copy of this sheet and fill it out with your own units.
SaaS Metrics: http://a16z.com/2015/08/21/16-metrics/ and http://a16z.com/2015/09/23/16-more-metrics/
Key things to check:
LTV : CAC ratio should be > 3
Your payback period should be definitely be 12 months or less, and ideally less than 9 months (some say 4 months)
Gross Churn should be < 3%. Said differently, your customer lifetime value should not be less than 33 months. (ideally forecast 3 year customer lives).
Bill Upfront if at all possible -- this is key
A note to hardware companies from Bolt.VC:
Most of our companies have fairly simple business models, either pure hardware sale, hardware sale + consumables, or hardware sale + SaaS. Very few have pure HaaS (Byte is certainly an exception, and definitely has one of the more complex operating models in our portfolio).
Because of that, and the stage of most of our companies, we don't spend much time doing detailed financial models. A very basic one, built off of a product's unit economics is typically sufficient. The hard part is figuring out the right inputs to this model (COGS, CAC, LTV, Sales Cycles, etc).
While we don't spend a lot of time doing detailed financial models or projections, we spend a TON of time working with founders on their 12-18 month operating plans. I think founders tend to do a decent job of understanding what drives their business at scale, but a very poor job at near-term cash management and having a handle on their operating plan.
I've never worked with him, but heard people recommend Taylor from Foresite: https://foresight.is/