Unit economics is one of the indicators of the health of a SaaS business. Unit economics is an indicator that expresses profitability on a unit basis, and was originally a management term, and is also used by investors in SaaS businesses to evaluate the business.
In addition, the business strategy that should be adopted now and the optimal marketing cost will be clarified from unit economics. This time, we will introduce business strategies and marketing cost optimization derived from unit economics.
What is unit economics?
In SaaS businesses, unit economics is an important management indicator for determining the health of the business. In SaaS businesses, investors look at unit economics to evaluate profitability per unit (business or customer).
Additionally, optimal marketing costs can be derived from unit economics. This makes it easier to decide whether to spend more money to accelerate customer acquisition or to reduce costs and improve customer acquisition.
SaaS businesses are mainly based on subscriptions that are designed for continuous use. Unlike traditional outright sales businesses, once a customer is acquired, the costs invested in acquiring the customer cannot be recovered and the business is in the red. Because it is a system that recovers costs and generates profits through continued use, the longer it is used, the higher the profitability will be.
In the case of a sell-out business, the health of the business can be determined by the income statement, but in the case of a SaaS business, it is necessary to evaluate long-term profits as mentioned above, and it becomes a valuable evaluation resource.
Unit economics calculation method
Unit economics is calculated by CAC (cost per customer acquisition) and LTV (lifetime value).
Unit economics = LTV / CAC
CAC refers to the “cost per customer acquisition” and is calculated by dividing the total cost of acquiring new customers by the number of customers acquired.
In addition, LTV (lifetime value) refers to “customer lifetime value,” and it means how much profit is earned from a customer during the period from the time the customer starts doing business with your service until the end of that transaction. Masu. Generally, LTV is calculated using the following formula.
LTV=Average purchase unit price × Average purchase frequency × Average duration
For SaaS businesses, the average monthly usage cost can be calculated from the churn rate, and the calculation formula is as follows.
LTV = Monthly average usage unit price ÷ Churn rate
Appropriate value of unit economics and cost recovery period
Even if you calculate the unit economics, you cannot judge whether the value itself is appropriate.The standard is an appropriate value that can be evaluated as a healthy SaaS business.
① Appropriate value of unit economics
It is said that a value of 3 times or more is appropriate for unit economics. If it is 3 times or more, the business is considered to be in a healthy state. Even in the SaaS business, companies that are perceived as successful have a score of 3 or higher.
However, if the number is too high, even if it is 3 or higher, it may mean that you are not spending enough on acquiring new customers and are missing opportunities to acquire new customers. By understanding unit economics, you can understand the appropriate investment cost for customer acquisition and conduct marketing.
②Appropriate cost recovery period
In addition to unit economics, it is also necessary to consider the cost of new development.
It is called the payback period, and in SaaS businesses, it is an important indicator for investors to evaluate how long it will take to recover the costs of marketing and sales. Payback period is calculated by dividing CAC by MRR (Monthly Recurring Revenue).
payback period = CAC ÷ MRR (monthly recurring revenue)
It is better to recover the costs of lack of customer acquisition as soon as possible, and the shorter the payback period, the healthier the business is. It is said that 6 to 12 months is an appropriate evaluation period for the payback period.
In other words, if it takes more than 12 months to recover the customer acquisition costs, the burden of customer acquisition costs will increase and there will be a risk of going into the red, which is not a healthy business situation.
How to maintain proper unit economics
It is important not only to understand unit economics, but also to work on improvements to maintain appropriate values. To improve unit economics, there are ways to approach LTV and CAC separately.
①Improve LTV
Improved churn rate
To improve your churn rate, it is important to first find and clarify the cause. If these numbers remain in a bad state, even if you develop new customer contracts, your profits will only worsen.
If one of the reasons for cancellation is that the product or service is not fully utilized, we will build a customer success system and strengthen onboarding to encourage companies to stick with the service. Also, if the charges are higher than other companies or there are problems with the service itself, you may need to consider reviewing the service itself.
Promote upsell and cross-sell
By introducing customer success and CRM tools, we will strengthen customer relationships, increase existing customer satisfaction, and lead to upsells and cross-sells. If upsells and cross-sells are successful, the average spend per customer increases, and LTV increases.
What is customer success? Comparison and explanation of similar but different customer support | MarkeTRUNK
What is cross-selling to improve the cost per customer? Introducing usage methods and specific examples
②CAC improvement
Changes in marketing measures
To improve CAC, it is effective to change measures that can be done without incurring any cost. Specifically, we will focus on content marketing, webinars, and email marketing that can generate search traffic without placing advertisements such as listing advertisements or exhibiting at exhibitions.
Improving conversion rate, deal acquisition rate, and order acceptance rate
Measures to increase conversion rates in marketing and sales are also effective. In the case of marketing, we will review CTAs such as downloading materials and inquiries on the website to improve conversion rates.
How to improve conversion rate by designing and reviewing CTA | MarketTRUNK
In addition, in sales, inside sales will strengthen nurturing and improve talk scripts to improve the deal acquisition rate, and field sales will review the deal process and shorten the lead time until order acceptance. We will strive to improve this.
summary
- In SaaS business, unit economics is an important management indicator for determining the health of the business. You can evaluate profitability per unit (business or customer) and calculate optimal marketing costs from customer acquisition costs.
- Unit economics is calculated using CAC (cost per customer acquisition) and LTV (lifetime value). Additionally, in the case of SaaS businesses, LTV can be calculated from the monthly average usage cost and churn rate.
- It is said that a unit economics value of 3 or higher is appropriate, but if it is too high even if it is 3 or higher, it is considered that you are not spending enough on acquiring new customers and are missing opportunities to acquire new customers.
- It is important not only to understand unit economics, but also to work on improvements to maintain appropriate values. There are two approaches to improving unit economics: LTV and CAC.