What are your Unit Economics?
A question that most entrepreneurs get asked by investors in fund raising discussions or in board meetings. Pun intended, it is the “Million Dollar Question”.
So what is the answer?
Entrepreneurs who get funded are those who the sell the future very well. That’s a no brainer. We look for the ideas to sell the future as rosily ‘profitably’ as possible. Unit Economics (UE) is one such idea.
Simply explained, UE measures the long-term value of a Business consumer (revenues that you retain) while comparing the cost of acquiring that user. In the case of Zara’s launch in Mumbai, they splurged heavily advertising their store launches but once the consumer strolled in, they’ve been strolling in forever. It can easily be argued that Zara has a very strong UE because…?
You guessed right — Their consumes keep coming back. Zara can statistically prove that ‘Once a Zara buyer, always a Zara buyer’. They can also tell you how many garments a typical consumer will buy each month; the average revenue per consumer and Zara’s margins on those sales. The question is: Can you predict the same about your users with the same nuclear detail?
Consider the business of Mobile Games that I run: While themes such as ‘Car Driving and Parking’ and Dress Up do very well, we have only 3–5% of players playing our games at the end of the month after they downloaded it. That’s the industry standard! Will consumers playing these games buy in-apps in between? Sure they will, but there is no ‘formula’ we have to predict the LTV (Life Time Value) of each game until we have at least three months of data (aka game plays) of that game. In between all of this, if consumers don’t ‘like’ the game (a zillion reasons why), all our calculations go for a toss.
My insight about Unit Economics is that while the cost of acquiring consumers happens NOW, revenue from them comes LATER. It’s correctly predicting the delta between NOW and LATER (almost the job of a fortune teller). Ps — If you’re a newly minted entrepreneur & assume that consumers will behave they way you want them to let me spoil you mood by telling you that they won’t.
Remember Rodinhood’s rule: Consumers don’t behave in real life the way we predict they behave in excel sheets.
- Unit Economics is great if you have predictable revenues profitability of consumers as predictable as Vada Paavs being tasty in Mumbai.
- Don’t base User Economics just because you’re good at Excel. Use it because you are a great entrepreneur who can make consumers generate profits for you for a lifetime!