If you want to maximise the company valuation for your SAAS or E-Commerce Biz then understand, constantly monitoring and tweaking your Unit Economics is the key to a higher valuation £££. This article will explain the basics👇
Ever wondered why people invest in companies that are making no profit? The answer is hidden in their Unit Economics. Unit Economics refers to the amount of Revenue & the costs associated with one unit. A unit is usually a customer, but it could be a product.
Lifetime Revenue (LTR). Indicates how much Revenue one customer brings in over their lifetime. Most billing systems will help you calculate this, but you can do this easily enough yourself…
LTR = Average number of transactions (T) x Average Order Value (AOV or ARPA/C) x Average Lifetime (ALT).
Increase your LTR by increasing your price or getting customers to buy more often (T). The real key here though - especially for a SAAS business - is to reduce your Churn which increases the lifetime value. Reducing churn is often cheaper than acquiring new clients!
Next, understand and watch like a hawk your Gross Profits margin (GP%). Which is Revenue minus your Cost of Goods Sold (COGS). Your GP% (or margin) is your Gross Profit / Revenue x 100.
Calculating your COGS is where so many businesses go wrong. Only include costs that directly relate to providing your service (SAAS) or producing your product (E-Commerce). Do not include sales/marketing, product development, or any other overheads.
As your business scales, you should see a reduction in COGS and an improved GP%. Economies of scale kick in for purchasing materials, for example. The other way to achieve this is to be more efficient in the output of your direct wages.
One of the two key Metrics, Lifetime Value (LTV), is then simple to calculate. Lifetime Revenue (LTR) x Gross Profit % (GP).
The second key metric is Customer Acquisition Costs (CAC). This shows how much it costs you to get each new Customer. On the surface this is a simple calculation: CAC = marketing spend / number of new Customers.
In truth, CAC can be complex as it can vary for each industry. You could take a blended CAC over months. You can break this down to show CAC by different marketing channels etc.
If accurately measuring your historical CAC can be tricky then you can imagine how hard it is to accurately predict future CAC. It can swing wildly as you experiment with channels & generally over time it will increase, especially as more competition enters the market.
The power of Unit Economics comes from Combining Lifetime Value (LTV) and Customer Acquisition Costs (CAC). This is expressed as a ratio of LTV: CAC.
A common goal for LTV: CAC is said to be 3. You make 3 x the amount it costs you to acquire a customer. Anything below this means you are very likely not going to make any money. Anything above this shows you could pay more for each client and therefore scale quicker.
The real power comes from constantly monitoring your LTV: CAC and using it to help you decide whether to put your foot down or ease off the accelerator a little. This is a simplistic overview of the topic, each business and industry will have its quirks.
A bit about me, I own Crisp Accountancy specialising in providing outsourced finance functions to growing businesses. I act as CFO for many biz, especially in SAAS & E-Commerce. I regularly speak to VC/PE investors with my clients so have a good idea of what they are looking for!
About the author
Luke Desmond
Fractional CFO for Tech, eCommerce & SaaS. CEO @Crisp_Acc provides virtual finance functions. Co-Founder @getvaulta SaaS Startup for accountants.